rgld_Current_Folio_10Q

Table of Contents

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q


 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended December 31, 2018

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from        to        

 

Commission File Number: 001-13357

 


Royal Gold, Inc.

(Exact Name of Registrant as Specified in Its Charter)


 

Delaware

    

84-0835164

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation)

 

Identification No.)

 

 

 

1660 Wynkoop Street, Suite 1000

 

 

Denver, Colorado

 

80202

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code (303) 573-1660

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒     No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files)  Yes ☒    No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

Large accelerated filer ☒

Accelerated filer 

Non-accelerated filer    

Smaller reporting company 

Emerging growth company 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒

 

There were 65,516,940 shares of the Company’s common stock, par value $0.01 per share, outstanding as of January 31, 2019.    

 

 

 

 


 

Table of Contents

 

 

INDEX

 

 

 

 

 

PAGE

 

 

 

    

 

PART I 

    

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1. 

 

Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets

 

3

 

 

Consolidated Statements of Operations and Comprehensive Income (Loss)

 

4

 

 

Consolidated Statements of Cash Flows

 

5

 

 

Notes to Consolidated Financial Statements

 

6

 

 

 

 

 

Item 2. 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

17

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures about Market Risk

 

30

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

31

 

 

 

 

 

PART II 

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

31

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

31

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

32

 

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

 

32

 

 

 

 

 

Item 4. 

 

Mine Safety Disclosure

 

32

 

 

 

 

 

Item 5. 

 

Other Information

 

32

 

 

 

 

 

Item 6. 

 

Exhibits

 

32

 

 

 

 

 

SIGNATURES 

 

33

 

 

2


 

Table of Contents

ITEM 1.     FINANCIAL STATEMENTS

 

ROYAL GOLD, INC.

Consolidated Balance Sheets

(Unaudited, in thousands except share data)

 

 

 

 

 

 

 

 

 

    

December 31, 2018

    

June 30, 2018

ASSETS

 

 

 

 

 

 

Cash and equivalents

 

$

156,536

 

$

88,750

Royalty receivables

 

 

25,659

 

 

26,356

Income tax receivable

 

 

12,793

 

 

40

Stream inventory

 

 

7,954

 

 

9,311

Prepaid expenses and other

 

 

793

 

 

1,350

Total current assets

 

 

203,735

 

 

125,807

Stream and royalty interests, net (Note 2)

 

 

2,419,908

 

 

2,501,117

Other assets

 

 

51,463

 

 

55,092

Total assets

 

$

2,675,106

 

$

2,682,016

LIABILITIES

 

 

 

 

 

 

Accounts payable

 

$

2,291

 

$

9,090

Dividends payable

 

 

17,359

 

 

16,375

Income tax payable

 

 

10,739

 

 

18,253

Withholding taxes payable

 

 

2,348

 

 

3,254

Other current liabilities

 

 

4,439

 

 

4,411

Total current liabilities

 

 

37,176

 

 

51,383

Debt (Note 3)

 

 

358,897

 

 

351,027

Deferred tax liabilities

 

 

90,700

 

 

91,147

Uncertain tax positions

 

 

35,590

 

 

33,394

Other long-term liabilities

 

 

5,773

 

 

13,796

Total liabilities

 

 

528,136

 

 

540,747

Commitments and contingencies (Note 10)

 

 

 

 

 

 

EQUITY

 

 

 

 

 

 

Preferred stock, $.01 par value, 10,000,000 shares authorized; and 0 shares issued

 

 

 —

 

 

 —

Common stock, $.01 par value, 200,000,000 shares authorized; and 65,396,339 and 65,360,041 shares outstanding, respectively

 

 

654

 

 

654

Additional paid-in capital

 

 

2,197,254

 

 

2,192,612

Accumulated other comprehensive loss

 

 

-

 

 

(1,201)

Accumulated losses

 

 

(86,238)

 

 

(89,898)

Total Royal Gold stockholders’ equity

 

 

2,111,670

 

 

2,102,167

Non-controlling interests

 

 

35,300

 

 

39,102

Total equity

 

 

2,146,970

 

 

2,141,269

Total liabilities and equity

 

$

2,675,106

 

$

2,682,016

 

The accompanying notes are an integral part of these consolidated financial statements.

3


 

Table of Contents

ROYAL GOLD, INC.

Consolidated Statements of Operations and Comprehensive Income (Loss) 

(Unaudited, in thousands except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For The Three Months Ended

 

For The Six Months Ended

 

 

 

December 31, 

 

December 31, 

 

December 31, 

 

December 31, 

 

 

    

2018

    

2017

    

2018

    

2017

    

Revenue

 

$

97,592

 

$

114,348

 

$

197,585

 

$

226,824

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

18,162

 

 

19,863

 

 

34,689

 

 

40,282

 

General and administrative

 

 

7,423

 

 

9,555

 

 

17,349

 

 

16,455

 

Production taxes

 

 

909

 

 

602

 

 

2,201

 

 

1,145

 

Exploration costs

 

 

842

 

 

1,358

 

 

5,204

 

 

4,561

 

Depreciation, depletion and amortization

 

 

38,807

 

 

42,008

 

 

81,358

 

 

81,701

 

Total costs and expenses

 

 

66,143

 

 

73,386

 

 

140,801

 

 

144,144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

31,449

 

 

40,962

 

 

56,784

 

 

82,680

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value changes in equity securities

 

 

(3,631)

 

 

 —

 

 

(5,099)

 

 

 —

 

Interest and other income

 

 

487

 

 

645

 

 

590

 

 

1,634

 

Interest and other expense

 

 

(7,410)

 

 

(9,034)

 

 

(15,287)

 

 

(17,651)

 

Income before income taxes

 

 

20,895

 

 

32,573

 

 

36,988

 

 

66,663

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit (expense)

 

 

 2,148

 

 

(48,360)

 

 

(1,967)

 

 

(55,904)

 

Net income (loss)  

 

 

23,043

 

 

(15,787)

 

 

35,021

 

 

10,759

 

Net loss attributable to non-controlling interests

 

 

543

 

 

1,022

 

 

3,575

 

 

3,105

 

Net income (loss) attributable to Royal Gold common stockholders

 

$

23,586

 

$

(14,765)

 

$

38,596

 

$

13,864

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

23,043

 

$

(15,787)

 

$

35,021

 

$

10,759

 

Adjustments to comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized change in market value of available-for-sale securities

 

 

 —

 

 

(390)

 

 

 —

 

 

(193)

 

Comprehensive income (loss) 

 

 

23,043

 

 

(16,177)

 

 

35,021

 

 

10,566

 

Comprehensive loss attributable to non-controlling interests

 

 

543

 

 

1,022

 

 

3,575

 

 

3,105

 

Comprehensive income (loss) attributable to Royal Gold stockholders

 

$

23,586

 

$

(15,155)

 

$

38,596

 

$

13,671

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share available to Royal Gold common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

0.36

 

$

(0.23)

 

$

0.59

 

$

0.21

 

Basic weighted average shares outstanding

 

 

65,395,457

 

 

65,306,766

 

 

65,385,161

 

 

65,271,131

 

Diluted earnings (loss) per share

 

$

0.36

 

$

(0.23)

 

$

0.59

 

$

0.21

 

Diluted weighted average shares outstanding

 

 

65,473,400

 

 

65,306,766

 

 

65,485,423

 

 

65,460,430

 

Cash dividends declared per common share

 

$

0.265

 

$

0.25

 

$

0.515

 

$

0.49

 

 

The accompanying notes are an integral part of these consolidated financial statements.

4


 

Table of Contents

ROYAL GOLD, INC.

Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

For The Six Months Ended

 

 

December 31, 

 

December 31, 

 

    

2018

    

2017

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

35,021

 

$

10,759

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

81,358

 

 

81,701

Amortization of debt discount and issuance costs

 

 

7,864

 

 

7,413

Non-cash employee stock compensation expense

 

 

4,070

 

 

4,395

Fair value changes in equity securities

 

 

5,099

 

 

Deferred tax (benefit) expense

 

 

(307)

 

 

28,958

Other  

 

 

 —

 

 

(158)

Changes in assets and liabilities:

 

 

 

 

 

 

Royalty receivables

 

 

697

 

 

(2,399)

Stream inventory

 

 

1,356

 

 

524

Income tax receivable

 

 

(12,753)

 

 

(5,197)

Prepaid expenses and other assets

 

 

2,305

 

 

(328)

Accounts payable

 

 

(7,026)

 

 

(1,658)

Income tax payable

 

 

(7,514)

 

 

9,445

Withholding taxes payable

 

 

(906)

 

 

26

Uncertain tax positions

 

 

2,197

 

 

4,560

Other liabilities

 

 

(7,993)

 

 

9,193

Net cash provided by operating activities

 

$

103,468

 

$

147,234

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Acquisition of stream and royalty interests

 

 

(55)

 

 

 —

Purchase of equity securities

 

 

(3,569)

 

 

 —

Other

 

 

(87)

 

 

(94)

Net cash used in investing activities

 

$

(3,711)

 

$

(94)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Repayment of revolving credit facility

 

 

 —

 

 

(100,000)

Net payments from issuance of common stock

 

 

(2,217)

 

 

(3,541)

Common stock dividends

 

 

(32,754)

 

 

(31,391)

Contributions from non-controlling interest

 

 

2,790

 

 

 —

Other

 

 

210

 

 

77

Net cash used in financing activities

 

$

(31,971)

 

$

(134,855)

Net increase in cash and equivalents

 

 

67,786

 

 

12,285

Cash and equivalents at beginning of period

 

 

88,750

 

 

85,847

Cash and equivalents at end of period

 

$

156,536

 

$

98,132

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

5


 

Table of Contents

ROYAL GOLD, INC.

Notes to Consolidated Financial Statements

(Unaudited)

1.    OPERATIONS, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS

 

Royal Gold, Inc. (“Royal Gold”, the “Company”, “we”, “us”, or “our”), together with its subsidiaries, is engaged in the business of acquiring and managing metal streams, royalties and similar interests.  We seek to acquire existing stream and royalty interests or to finance mining projects that are in production or in the development stage in exchange for stream or royalty interests.  A metal stream is a purchase agreement that provides, in exchange for an upfront deposit payment, the right to purchase all or a portion of one or more metals produced from a mine at a price determined for the life of the transaction by the purchase agreement.  A royalty is a non-operating interest in a mining project that provides the right to revenue or metals produced from the project after deducting contractually specified costs, if any. 

 

Summary of Significant Accounting Policies

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934, as amended.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for annual financial statements.  In the opinion of management, all adjustments which are of a normal recurring nature considered necessary for a fair presentation of our interim financial statements have been included in this Form 10-Q.  Operating results for the three and six months ended December 31, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2019.  These interim unaudited financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2018 filed with the Securities and Exchange Commission on August 9, 2018 (“Fiscal 2018 10-K”).

 

Recently Adopted Accounting Standards

 

Revenue Recognition

 

On July 1, 2018, we adopted Accounting Standards Codification 606 - Revenue from Contracts with Customers (“ASC 606”) using the modified retrospective method of transition.  Under this transition approach, we applied ASC 606 to all existing contracts for which all (or substantially all) of the revenue attributable to a contract had not been recognized under legacy revenue guidance.  The guidance of ASC 606 will also be applied to any new contracts entered into on or after July 1, 2018.

 

ASC 606 supersedes nearly all of the existing revenue recognition guidance under U.S. GAAP and sets out a five-step revenue recognition framework to recognize revenue upon the transfer of control of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services.

 

For the three and six months ended December  31, 2018, there was no impact to our reported revenue, operating costs and expenses or net income attributable to Royal Gold common stockholders as a result of adopting ASC 606, as compared to legacy revenue guidance under U.S. GAAP.  In addition, no cumulative catch-up adjustment to accumulated losses was required on July 1, 2018 as a result of adopting ASC 606.  Please refer to Note 4 for additional discussion.

 

Recognition and Measurement of Financial Instruments

 

On July 1, 2018, we adopted Accounting Standards Update (“ASU”) 2016-01 – Financial Instrument, which is guidance on the recognition and measurement of financial instruments.  The amended guidance requires, among other things, that equity securities previously classified as available-for-sale be measured at fair value with changes in fair value recognized in net income rather than other comprehensive income (loss) as required under previous guidance.  Upon adoption, the Company recorded a cumulative-effect adjustment in Accumulated losses of $1.2 million.  The decrease in fair value of our equity securities was approximately $3.6 million and $5.1 million for the three and six months ended December  31, 2018, respectively, and is included in Fair value change of marketable equity securities on our consolidated statements of operations and comprehensive income (loss).  The carrying value of the Company’s equity securities as of December 31, 2018 and June 30, 2018 was $17.7 million and $19.2 million, respectively, and is included in Other assets on the

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Table of Contents

ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Company’s consolidated balance sheets. As of December 31, 2018, the Company owns 809,744 common shares of Contango Ore, Inc. (“CORE”) and 3,597,823 common shares of Rubicon Minerals Corporation.

 

Recently Issued Accounting Standards

 

Leases

 

In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, Leases (Topic 842) which requires recognition of right-of-use assets and lease payment liabilities on the balance sheet by lessees for virtually all leases currently classified as operating leasesUnder ASU 2016-02, companies are permitted to make a policy election to not recognize lease assets or liabilities when the term of the lease is less than twelve months.  The new guidance is effective for the Company’s fiscal year beginning July 1, 2019, and early adoption is permitted.  We are currently evaluating the transition effort and impact, if any, this guidance will have on our consolidated financial statements and footnote disclosures.

 

2.    STREAM AND ROYALTY INTERESTS, NET

 

The following tables summarize the Company’s stream and royalty interests, net as of December 31, 2018 and June 30, 2018.

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018 (Amounts in thousands):

    

Cost

    

Accumulated Depletion

    

Net

Production stage stream interests:

 

 

 

 

 

 

 

 

 

Mount Milligan

 

$

790,635

 

$

(164,639)

 

$

625,996

Pueblo Viejo

 

 

610,404

 

 

(135,152)

 

 

475,252

Andacollo

 

 

388,182

 

 

(73,736)

 

 

314,446

Rainy River

 

 

175,727

 

 

(8,940)

 

 

166,787

Wassa and Prestea

 

 

146,475

 

 

(51,523)

 

 

94,952

Total production stage stream interests

 

 

2,111,423

 

 

(433,990)

 

 

1,677,433

Production stage royalty interests:

 

 

 

 

 

 

 

 

 

Voisey's Bay

 

 

205,724

 

 

(92,244)

 

 

113,480

Peñasquito

 

 

99,172

 

 

(39,827)

 

 

59,345

Holt

 

 

34,612

 

 

(21,946)

 

 

12,666

Cortez

 

 

20,878

 

 

(11,428)

 

 

9,450

Other

 

 

487,224

 

 

(377,655)

 

 

109,569

Total production stage royalty interests

 

 

847,610

 

 

(543,100)

 

 

304,510

Total production stage stream and royalty interests

 

 

2,959,033

 

 

(977,090)

 

 

1,981,943

 

 

 

 

 

 

 

 

 

 

Development stage stream interests:

 

 

 

 

 

 

 

 

 

Other

 

 

12,038

 

 

 —

 

 

12,038

 

 

 

 

 

 

 

 

 

 

Development stage royalty interests:

 

 

 

 

 

 

 

 

 

Cortez

 

 

59,803

 

 

 —

 

 

59,803

Other

 

 

70,952

 

 

 —

 

 

70,952

Total development stage royalty interests

 

 

130,755

 

 

 —

 

 

130,755

Total development stage stream and royalty interests

 

 

142,793

 

 

 —

 

 

142,793

 

 

 

 

 

 

 

 

 

 

Exploration stage royalty interests:

 

 

 

 

 

 

 

 

 

Pascua-Lama

 

 

177,690

 

 

 —

 

 

177,690

Other

 

 

117,482

 

 

 —

 

 

117,482

Total exploration stage royalty interests

 

 

295,172

 

 

 —

 

 

295,172

Total stream and royalty interests, net

 

$

3,396,998

 

$

(977,090)

 

$

2,419,908

 

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Table of Contents

ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2018 (Amounts in thousands):

    

Cost

    

Accumulated Depletion

    

Impairments

 

Net

Production stage stream interests:

 

 

 

 

 

 

 

 

 

 

 

 

Mount Milligan

 

$

790,635

 

$

(152,833)

 

$

 —

 

$

637,802

Pueblo Viejo

 

 

610,404

 

 

(114,944)

 

 

 —

 

 

495,460

Andacollo

 

 

388,182

 

 

(59,851)

 

 

 —

 

 

328,331

Wassa and Prestea

 

 

146,475

 

 

(41,601)

 

 

 —

 

 

104,874

Rainy River

 

 

175,727

 

 

(4,028)

 

 

 —

 

 

171,699

Total production stage stream interests

 

 

2,111,423

 

 

(373,257)

 

 

 —

 

 

1,738,166

Total production stage stream and royalty interests

 

 

 

 

 

 

 

 

 

 

 

 

Production stage royalty interests:

 

 

 

 

 

 

 

 

 

 

 

 

Voisey's Bay

 

 

205,724

 

 

(86,933)

 

 

 —

 

 

118,791

Peñasquito

 

 

99,172

 

 

(38,426)

 

 

 —

 

 

60,746

Holt

 

 

34,612

 

 

(21,173)

 

 

 —

 

 

13,439

Cortez

 

 

20,878

 

 

(11,241)

 

 

 —

 

 

9,637

Other

 

 

483,795

 

 

(364,795)

 

 

 —

 

 

119,000

Total production stage royalty interests

 

 

844,181

 

 

(522,568)

 

 

 —

 

 

321,613

Total production stage stream and royalty interests

 

 

2,955,604

 

 

(895,825)

 

 

 —

 

 

2,059,779

Development stage stream interests:

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

12,038

 

 

 —

 

 

 —

 

 

12,038

 

 

 

 

 

 

 

 

 

 

 

 

 

Development stage royalty interests:

 

 

 

 

 

 

 

 

 

 

 

 

Cortez

 

 

59,803

 

 

 —

 

 

 —

 

 

59,803

Other

 

 

74,610

 

 

 —

 

 

(284)

 

 

74,326

Total development stage royalty interests

 

 

134,413

 

 

 —

 

 

(284)

 

 

134,129

Total development stage stream and royalty interests

 

 

146,451

 

 

 —

 

 

(284)

 

 

146,167

 

 

 

 

 

 

 

 

 

 

 

 

 

Exploration stage royalty interests:

 

 

 

 

 

 

 

 

 

 

 

 

Pascua-Lama

 

 

416,770

 

 

 —

 

 

(239,080)

 

 

177,690

Other

 

 

117,481

 

 

 —

 

 

 —

 

 

117,481

Total exploration stage royalty interests

 

 

534,251

 

 

 —

 

 

(239,080)

 

 

295,171

Total stream and royalty interests, net

 

$

3,636,306

 

$

(895,825)

 

$

(239,364)

 

$

2,501,117

 

Voisey’s Bay

 

The royalty on production of nickel, copper, cobalt and other minerals from the Voisey’s Bay mine in Newfoundland and Labrador, Canada is directly owned by the Labrador Nickel Royalty Limited Partnership (“LNRLP”), in which the Company’s wholly-owned indirect subsidiary is the general partner and 90% owner. The remaining 10% interest in LNRLP is owned by a subsidiary of Altius Minerals Corporation (“Altius”), a non-controlling interest.

 

On September 13, 2018, LNRLP entered into an agreement with Vale Canada Limited and certain of its subsidiaries (collectively, the “Parties”) to comprehensively settle their long-standing litigation related to calculation of the royalty on the sale of all concentrates produced from the Voisey’s Bay mine.  Refer to Note 14 of our Fiscal 2018 10-K for further discussion on the claims previously asserted by LNRLP.

 

The Parties agreed to a new method for calculating the royalty in respect of concentrates processed at Vale’s Long Harbour Processing Plant, which will be effective for all Voisey’s Bay mine production after April 1, 2018.  Under the terms of the settlement, Royal Gold expects the 3% royalty rate will apply to approximately 50% of the gross metal value in the concentrates at the nickel, copper and cobalt prices prevailing at the time of settlement.  As those metal prices rise or fall, the percentage of gross metal value in the concentrates applicable to the royalty would correspondingly increase or decrease.

8


 

Table of Contents

ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

During the three and six months ended December 31, 2018, the Company recognized approximately $2.5 million and $7.5 million (each period includes 10% non-controlling interest), respectively, in royalty revenue attributable to the Voisey’s Bay royalty.  Royalty revenue recognized on the Voisey’s Bay royalty for the quarter ended September 30, 2018 was attributable to metal production from the June 30 and September 30, 2018 quarters.  Royalty payments for each quarter are due 45 days after quarter-end.  Refer to Note 4 for further discussion on our revenue recognition.

 

3.    DEBT

 

The Company’s non-current debt as of December 31, 2018 and June 30, 2018 consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

As of June 30, 2018

 

   

Principal

   

Unamortized Discount

   

Debt Issuance Costs

   

Total

   

Principal

   

Unamortized Discount

   

Debt Issuance Costs

   

Total

 

 

 

(Amounts in thousands)

 

 

(Amounts in thousands)

Convertible notes due 2019

 

$

370,000

 

$

(6,205)

 

$

(635)

 

$

363,160

 

$

370,000

 

$

(12,764)

 

$

(1,316)

 

$

355,920

Revolving credit facility

 

 

 —

 

 

 —

 

 

(4,263)

 

 

(4,263)

 

 

 —

 

 

 —

 

 

(4,893)

 

 

(4,893)

Total debt

 

$

370,000

 

$

(6,205)

 

$

(4,898)

 

$

358,897

 

$

370,000

 

$

(12,764)

 

$

(6,209)

 

$

351,027

 

Convertible Senior Notes Due 2019

 

In June 2012, the Company completed an offering of $370 million aggregate principal amount of 2.875% convertible senior notes due 2019 (“2019 Notes”).  The 2019 Notes bear interest at the rate of 2.875% per annum, and the Company is required to make semi-annual interest payments on the outstanding principal balance of the 2019 Notes on June 15 and December 15 of each year, beginning December 15, 2012.  The 2019 Notes mature on June 15, 2019.  Generally, we classify debt that is maturing within one year as a current liability.  However, the Company has the intent and ability to settle the principal amount of the 2019 Notes in cash primarily from its available revolving credit facility, a non-current liability, as of December 31 and June 30, 2018.

 

Interest expense recognized on the 2019 Notes for the three and six months ended December 31, 2018 was $6.3 million and $12.6 million, respectively, compared to $6.1 million and $12.1 million, respectively, for the three and six months ended December 31, 2017, and included the contractual coupon interest, the accretion of the debt discount and amortization of the debt issuance costs.

 

Revolving credit facility

 

The Company maintains a $1 billion revolving credit facility.  As of December 31, 2018, the Company had no amounts outstanding and $1 billion available under the revolving credit facility.  Interest expense recognized on the revolving credit facility for the three and six months ended December 31, 2018 was $0.3 million and $0.6 million (amortization of debt issuance costs only), respectively, and $1.8 million and $3.6 million, respectively, for the three and six months ended December 31, 2017, which included interest on the outstanding borrowings and the amortization of the debt issuance costs.  Royal Gold may repay any borrowings under the revolving credit facility at any time without premium or penalty.

 

As discussed in Note 5 to the notes to consolidated financial statements in the Company’s Fiscal 2018 10-K, the Company has financial covenants associated with its revolving credit facility.  As of December 31, 2018, the Company was in compliance with each financial covenant.

 

4.    REVENUE

 

Revenue Recognition

 

Under current ASC 606 guidance, a performance obligation is a promise in a contract to transfer control of a distinct good or service (or integrated package of goods and/or services) to a customer. A contract’s transaction price is allocated to

9


 

Table of Contents

ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

each distinct performance obligation and recognized as revenue when, or as, a performance obligation is satisfied. In accordance with this guidance, revenue attributable to our stream interests and royalty interests is generally recognized at the point in time that control of the related metal production transfers to our customers.  The amount of revenue we recognize further reflects the consideration to which we are entitled under the respective stream or royalty agreement.  A more detailed summary of our revenue recognition policies for our stream and royalty interests is discussed below.

 

Stream Interests

 

A metal stream is a purchase agreement that provides, in exchange for an upfront deposit payment, the right to purchase all or a portion of one or more of the metals produced from a mine, at a price determined for the life of the transaction by the purchase agreement. Gold, silver and copper received under our metal streaming agreements are taken into inventory, and then sold primarily using average spot rate gold, silver and copper forward contracts.  The sales price for these average spot rate forward contracts is determined by the average daily gold, silver or copper spot prices during the term of the contract, typically a consecutive number of trading days between ten days and three months (depending on the frequency of deliveries under the respective streaming agreement and our sales policy in effect at the time) commencing shortly after receipt and purchase of the metal. We settle our forward sales contracts via physical delivery of the metal to the purchaser (our customer) on the settlement date specified in the contract. Under our forward sales contracts, there is a single performance obligation to sell a contractually specified volume of metal to the purchaser, and we satisfy this obligation at the point in time of physical delivery. Accordingly, revenue from our metal sales is recognized on the date of settlement, which is the date that control, custody and title to the metal transfer to the purchaser.

 

Royalty Interests

 

Royalties are non-operating interests in mining projects that provide the right to a percentage of revenue or metals produced from the project after deducting specified costs, if any. We are entitled to payment for our royalty interest in a mining project based on a contractually specified commodity price (for example, a monthly or quarterly average spot price) for the period in which metal production occurred.  As a royalty holder, we act as a passive entity in the production and operations of the mining project, and the third-party operator of the mining project is responsible for all mining activities, including subsequent marketing and delivery of all metal production to their ultimate customer. In all of our material royalty interest arrangements, we have concluded that we transfer control of our interest in the metal production to the operator at the point at which production occurs, and thus, the operator is our customer.  We have further determined that the transfer of each unit of metal production, comprising our royalty interest, to the operator represents a separate performance obligation under the contract, and each performance obligation is satisfied at the point in time of metal production by the operator.  Accordingly, we recognize revenue attributable to our royalty interests in the period in which metal production occurs at the specified commodity price per the agreement, net of any contractually allowable offsite treatment, refining, transportation and, if applicable, mining costs.

 

Royalty Revenue Estimates

 

For a small number of our royalty interests, we may not receive, or be entitled to receive, payment information, including production information from the operator, for the period in which metal production occurred prior to issuance of our financial statements.  As a result, we may estimate revenue for these royalties based on available information, including public information, from the operator.  If adequate information is not available from the operator or from other public sources before we issue our financial statements, the Company will recognize royalty revenue during the period in which the necessary payment information is received.  Differences between estimates and actual amounts could differ significantly and are recorded in the period that the actual amounts are known.  Please also refer to our “Use of Estimates” accounting policy discussed in our Fiscal 2018 10-K.  For the quarter ended December 31, 2018, royalty revenue that was estimated or was attributable to metal production for a period prior to December 31, 2018, was not material. 

 

10


 

Table of Contents

ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Disaggregation of Revenue

 

We have identified two material revenue sources in our business: stream interests and royalty interests. These identified revenue sources are consistent with our reportable segments as discussed in Note 8.

 

Revenue by metal type attributable to each of our revenue sources is disaggregated as follows:  

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

December 31, 2018

 

December 31, 2018

Stream revenue:

 

 

 

 

 

    Gold

$

53,179

 

$

112,293

    Silver

 

7,884

 

 

16,604

    Copper

 

6,616

 

 

8,819

         Total stream revenue

$

67,679

 

$

137,716

Royalty revenue:

 

 

 

 

 

    Gold

$

19,656

 

$

38,210

    Silver

 

1,567

 

 

2,919

    Copper

 

4,359

 

 

7,974

    Other

 

4,331

 

 

10,766

         Total royalty revenue

$

29,913

 

$

59,869

Total revenue

$

97,592

 

$

197,585

 

Revenue attributable to our principal stream and royalty interests is disaggregated as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

Metal(s)

 

December 31, 2018

 

December 31, 2018

Stream revenue:

 

 

 

 

 

 

 

 

    Mount Milligan

 

Gold & Copper

 

$

28,169

 

$

37,015

    Pueblo Viejo

 

Gold & Silver

 

 

18,230

 

 

37,717

    Wassa and Prestea

 

Gold

 

 

9,550

 

 

17,611

    Andacollo

 

Gold

 

 

7,635

 

 

35,378

    Other

 

Gold & Silver

 

 

4,095

 

 

9,995

         Total stream revenue

 

 

 

$

67,679

 

$

137,716

Royalty revenue:

 

 

 

 

 

 

 

 

    Peñasquito

 

Gold, Silver, Lead & Zinc

 

$

4,660

 

$

8,297

    Cortez

 

Gold

 

 

2,335

 

 

2,939

    Other

 

Various

 

 

22,918

 

 

48,633

         Total royalty revenue

 

 

 

$

29,913

 

$

59,869

Total revenue

 

 

 

$

97,592

 

$

197,585

 

Please refer to Note 8 for the geographical distribution of our revenue by reportable segment.

 

Contract Receivables

 

Under our forward sales contracts related to our metal streaming arrangements, payment is due from the purchaser on the day of settlement. Accordingly, our metal stream sales contracts do not give rise to a receivable under ASC 606.

 

Under our royalty arrangements, payment is typically due by the royalty payor either (i) monthly, typically thirty days after month-end or (ii) quarterly, typically thirty to sixty days after the respective quarter-end.  Revenue related to production that has occurred as of the reporting date but for which payment has not been received represents a receivable (rather than a contract asset) under ASC 606 as payment by the operator is unconditional upon the production of metal.  As of December 31, 2018, and June 30, 2018, our royalty receivables were $25.7 million and $26.4 million, respectively.

 

11


 

Table of Contents

ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Practical Expedients Utilized

 

Our forward sales contracts related to our metal streaming arrangements are short-term in nature with a term of one year or less. For these contracts, we have utilized the practical expedient allowed in ASC 606 that exempts us from presenting the transaction price allocated to remaining performance obligations (i.e. forecasts of unearned revenue) for contracts with an original expected term of one year or less.

 

Our royalty arrangements generally cover metal production over the life of a mine and, thus, have a contract term that is greater than one year.  Under these contracts, variability related to future production volumes and market pricing is allocated entirely to those future production volumes from the mining operation. Consequently, we have utilized an alternative practical expedient allowed in ASC 606 that exempts us from presenting the transaction price allocated to remaining performance obligations (i.e. forecasts of unearned revenue) if the variable consideration in a contract is allocated entirely to a wholly unsatisfied performance obligation.

 

 

5.    STOCK-BASED COMPENSATION

 

The Company recognized stock-based compensation expense as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

December 31, 

 

December 31, 

 

December 31, 

 

December 31, 

 

 

    

2018

    

2017

    

2018

    

2017

    

 

 

 

(Amounts in thousands)

 

 

(Amounts in thousands)

 

Stock options

 

$

33

 

$

79

 

$

154

 

$

170

 

Stock appreciation rights

 

 

408

 

 

486

 

 

1,175

 

 

974

 

Restricted stock

 

 

677

 

 

888

 

 

1,956

 

 

2,314

 

Performance stock

 

 

507

 

 

568

 

 

785

 

 

937

 

Total stock-based compensation expense

 

$

1,625

 

$

2,021

 

$

4,070

 

$

4,395

 

 

Stock-based compensation expense is included within General and administrative expense in the consolidated statements of operations and comprehensive income.

 

During the three and six months ended December 31, 2018, the Company granted the following stock-based compensation awards:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31, 

 

 

December 31, 

 

 

December 31, 

 

 

December 31, 

 

    

 

2018

    

 

2017

    

 

2018

    

 

2017

 

 

 

(Number of shares)

 

 

(Number of shares)

Stock options

 

 

 —

 

 

 —

 

 

6,430

 

 

6,858

Stock appreciation rights

 

 

 —

 

 

 —

 

 

69,360

 

 

71,262

Restricted stock

 

 

 —

 

 

 —

 

 

42,260

 

 

50,380

Performance stock (at maximum 200% attainment)

 

 

 —

 

 

 —

 

 

57,420

 

 

68,020

Total equity awards granted

 

 

 —

 

 

 —

 

 

175,470

 

 

196,520

 

12


 

Table of Contents

ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

As of December 31, 2018, unrecognized compensation expense (expressed in thousands below) and weighted-average vesting period for each of our stock-based compensation awards were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

Unrecognized

    

Weighted-

 

 

 

 

 

 

 

 

compensation

 

average vesting

 

 

 

 

 

 

 

 

expense

    

period (years)

Stock options

 

 

 

 

 

 

 

$

197

 

 

2.0

Stock appreciation rights

 

 

 

 

 

 

 

 

2,581

 

 

2.0

Restricted stock

 

 

 

 

 

 

 

 

5,744

 

 

3.2

Performance stock

 

 

 

 

 

 

 

 

1,307

 

 

1.7

 

 

6.    EARNINGS PER SHARE (“EPS”)

 

Basic earnings (loss) per common share were computed using the weighted average number of shares of common stock outstanding during the period, considering the effect of participating securities.  Unvested stock-based compensation awards that contain non-forfeitable rights to dividends or dividend equivalents are considered participating securities and are included in the computation of earnings per share pursuant to the two-class method.  The Company’s unvested restricted stock awards contain non-forfeitable dividend rights and participate equally with common stock with respect to dividends issued or declared.  The Company’s unexercised stock options, unexercised SSARs and unvested performance stock do not contain rights to dividends.  Under the two-class method, the earnings used to determine basic earnings (loss) per common share are reduced by an amount allocated to participating securities. Use of the two-class method has an immaterial impact on the calculation of basic and diluted earnings (loss) per common share.

 

The following tables summarize the effects of dilutive securities on diluted EPS for the period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

December 31, 

 

December 31, 

 

December 31, 

 

December 31, 

 

 

    

2018

    

2017

    

2018

    

2017

    

 

 

 

(in thousands, except per share data)

 

 

(in thousands, except per share data)

 

Net income (loss) available to Royal Gold common stockholders

 

$

23,586

 

$

(14,765)

 

$

38,596

 

$

13,864

 

Weighted-average shares for basic EPS

 

 

65,395,457

 

 

65,306,766

 

 

65,385,161

 

 

65,271,131

 

Effect of other dilutive securities

 

 

77,943

 

 

 

 

100,262

 

 

189,299

 

Weighted-average shares for diluted EPS

 

 

65,473,400

 

 

65,306,766

 

 

65,485,423

 

 

65,460,430

 

Basic earnings (loss) per share

 

$

0.36

 

$

(0.23)

 

$

0.59

 

$

0.21

 

Diluted earnings (loss) per share

 

$

0.36

 

$

(0.23)

 

$

0.59

 

$

0.21

 

 

The calculation of weighted average shares includes all of our outstanding common stock.  The Company intends to settle the principal amount of the 2019 Notes in cash from amounts available under our revolving credit facility.  As a result, there will be no impact to diluted earnings per share unless the share price of the Company’s common stock exceeds the conversion price of $102.29.

 

7.    INCOME TAXES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

December 31, 

 

December 31, 

 

December 31, 

 

December 31, 

 

    

2018

    

2017

    

2018

    

2017

 

 

(Amounts in thousands, except rate)

 

(Amounts in thousands, except rate)

Income tax benefit (expense)

 

$

2,148

 

$

(48,360)

 

$

 (1,967)

 

$

(55,904)

Effective tax rate

 

 

(10.3%)

 

 

148.5%

 

 

5.3%

 

 

83.9%

 

13


 

Table of Contents

ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

The decrease in the effective tax rate for the three and six months ended December 31, 2018 was primarily related to the Company’s refined analysis of the transition tax as part of H.R. 1, originally known as the Tax Cuts and Jobs Act (the “Act”), and our ability to utilize additional foreign tax credits.  As of December 31, 2018, the Company completed its analysis of the Act within the measurement period provided by Staff Accounting Bulletin No. 118 and the amounts are no longer considered provisional.  Despite the completion of our analysis, many aspects of the law remain unclear and future guidance could impact the Company.  A material impact due to evolving guidance is not anticipated, however, the Company will continue to monitor any new developments.

 

8.    SEGMENT INFORMATION

 

The Company manages its business under two reportable segments, consisting of the acquisition and management of stream interests and the acquisition and management of royalty interests.  Royal Gold’s long-lived assets (stream and royalty interests, net) are geographically distributed as shown in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

As of June 30, 2018

 

 

 

 

 

 

 

 

Total stream

 

 

 

 

 

 

 

 

 

 

Total stream

 

 

Stream

 

Royalty

 

and royalty

 

Stream

 

Royalty

 

 

 

 

and royalty

 

  

interest

  

interest

  

interests, net

  

interest

  

interest

  

Impairments

  

interests, net

Canada

 

$

792,783

 

$

206,039

 

$

998,822

 

$

809,500

 

$

214,562

 

$

(284)

 

$

1,023,778

Dominican Republic

 

 

475,252

 

 

 —

 

 

475,252

 

 

495,460

 

 

 —

 

 

 —

 

 

495,460

Chile

 

 

314,446

 

 

214,226

 

 

528,672

 

 

328,331

 

 

453,306

 

 

(239,080)

 

 

542,557

Africa

 

 

94,952

 

 

321

 

 

95,273

 

 

104,874

 

 

502

 

 

 —

 

 

105,376

Mexico

 

 

 —

 

 

87,211

 

 

87,211

 

 

 —

 

 

93,277

 

 

 —

 

 

93,277

United States

 

 

 —

 

 

164,277

 

 

164,277

 

 

 —

 

 

165,543

 

 

 —

 

 

165,543

Australia

 

 

 —

 

 

33,061

 

 

33,061

 

 

 —

 

 

34,254

 

 

 —

 

 

34,254

Other

 

 

12,039

 

 

25,301

 

 

37,340

 

 

12,039

 

 

28,833

 

 

 —

 

 

40,872

Total

 

$

1,689,472

 

$

730,436

 

$

2,419,908

 

$

1,750,204

 

$

990,277

 

$

 (239,364)

 

$

2,501,117

 

The Company’s revenue, cost of sales and net revenue by reportable segment for the three and six months ended December 31, 2018 and 2017 is geographically distributed as shown in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31, 2018

 

Three Months Ended December 31, 2017

 

    

Revenue

    

Cost of sales

    

Net revenue

    

Revenue

    

Cost of sales

    

Net revenue

Streams:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Canada

 

$

32,264

 

$

9,729

 

$

22,535

 

$

22,702

 

$

6,624

 

$

16,078

Dominican Republic

 

 

18,230

 

 

5,409

 

 

12,821

 

 

26,355

 

 

8,198

 

 

18,157

Chile

 

 

7,635

 

 

1,124

 

 

6,511

 

 

21,601

 

 

3,297

 

 

18,304

Africa

 

 

9,550

 

 

1,900

 

 

7,650

 

 

8,629

 

 

1,744

 

 

6,885

Total streams

 

$

67,679

 

$

18,162

 

$

49,517

 

$

79,287

 

$

19,863

 

$

59,424

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Royalties:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mexico

 

$

7,837

 

$

 —

 

$

7,837

 

$

10,854

 

$

 —

 

$

10,854

United States

 

 

8,284

 

 

 —

 

 

8,284

 

 

12,298

 

 

 —

 

 

12,298

Canada

 

 

7,536

 

 

 —

 

 

7,536

 

 

5,396

 

 

 —

 

 

5,396

Australia

 

 

3,157

 

 

 —

 

 

3,157

 

 

3,227

 

 

 —

 

 

3,227

Africa

 

 

532

 

 

 —

 

 

532

 

 

585

 

 

 —

 

 

585

Other

 

 

2,567

 

 

 —

 

 

2,567

 

 

2,701

 

 

 —

 

 

2,701

Total royalties

 

$

29,913

 

$

 —

 

$

29,913

 

$

35,061

 

$

 —

 

$

35,061

Total streams and royalties

 

$

97,592

 

$

18,162

 

$

79,430

 

$

114,348

 

$

19,863

 

$

94,485

 

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended December 31, 2018

 

Six Months Ended December 31, 2017

 

    

Revenue

    

Cost of sales

    

Net revenue

    

Revenue

    

Cost of sales

    

Net revenue

Streams:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Canada

 

$

47,010

 

$

13,994

 

$

33,016

 

$

54,654

 

$

15,847

 

$

38,807

Dominican Republic

 

 

37,717

 

 

11,733

 

 

25,984

 

 

51,758

 

 

15,785

 

 

35,973

Chile

 

 

35,378

 

 

5,402

 

 

29,976

 

 

33,938

 

 

5,109

 

 

28,829

Africa

 

 

17,611

 

 

3,560

 

 

14,051

 

 

17,699

 

 

3,541

 

 

14,158

Total streams

 

$

137,716

 

$

34,689

 

$

103,027

 

$

158,049

 

$

40,282

 

$

117,767

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Royalties:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mexico

 

$

15,833

 

$

 —

 

$

15,833

 

$

21,751

 

$

 —

 

$

21,751

United States

 

 

14,340

 

 

 —

 

 

14,340

 

 

22,727

 

 

 —

 

 

22,727

Canada

 

 

17,717

 

 

 —

 

 

17,717

 

 

11,488

 

 

 —

 

 

11,488

Australia

 

 

6,217

 

 

 —

 

 

6,217

 

 

6,548

 

 

 —

 

 

6,548

Africa

 

 

1,024

 

 

 —

 

 

1,024

 

 

1,047

 

 

 —

 

 

1,047

Other

 

 

4,738

 

 

 —

 

 

4,738

 

 

5,214

 

 

 —

 

 

5,214

Total royalties

 

$

59,869

 

$

 —

 

$

59,869

 

$

68,775

 

$

 —

 

$

68,775

Total streams and royalties

 

$

197,585

 

$

34,689

 

$

162,896

 

$

226,824

 

$

40,282

 

$

186,542

 

 

9.    FAIR VALUE MEASUREMENTS

 

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy under ASC 820 are described below:

 

Level 1:   Quoted prices for identical instruments in active markets;

 

Level 2:   Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and

 

Level 3:   Prices or valuation techniques requiring inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

The following table sets forth the Company’s financial assets measured at fair value on a recurring basis (at least annually) by level within the fair value hierarchy.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

 

Carrying

 

Fair Value

 

    

Amount

    

Total

    

Level 1

    

Level 2

    

Level 3

Assets (In thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities(1)

 

$

17,681

 

$

17,681

 

$

17,681

 

$

 —

 

$

 —

Total assets

 

$

17,681

 

$

17,681

 

$

17,681

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities (In thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt(2)

 

$

440,795

 

$

371,388

 

$

371,388

 

$

 —

 

$

 —

Total liabilities

 

$

440,795

 

$

371,388

 

$

371,388

 

$

 —

 

$

 —


(1)

Included in Other assets on the Company’s consolidated balance sheets.

(2)

Included in the carrying amount is the equity component of our 2019 Notes in the amount of $77 million, which is included within Additional paid-in capital on the Company’s consolidated balance sheets.

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

The Company’s marketable equity securities classified within Level 1 of the fair value hierarchy are valued using quoted market prices in active markets.  The fair value of the Level 1 marketable equity securities is calculated as the quoted market price of the marketable equity security multiplied by the quantity of shares held by the Company.  The Company’s debt classified within Level 1 of the fair value hierarchy is valued using quoted prices in an active market. 

 

As of December 31, 2018, the Company also had assets that, under certain conditions, are subject to measurement at fair value on a non-recurring basis like those associated with stream and royalty interests, intangible assets and other long-lived assets.  For these assets, measurement at fair value in periods subsequent to their initial recognition is applicable if any of these assets are determined to be impaired.  If recognition of these assets at their fair value becomes necessary, such measurements will be determined utilizing Level 3 inputs. 

 

10.COMMITMENTS AND CONTINGENCIES

 

Ilovica Gold Stream Acquisition

 

As of December 31, 2018, the Company’s conditional funding schedule for $163.75 million related to its Ilovica gold stream acquisition made in October 2014 remains subject to certain conditions.

 

 

 

 

 

 

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ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

General

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide information to assist you in better understanding and evaluating our financial condition and results of operations.  Royal Gold, Inc. (“Royal Gold”, the “Company”, “we”, “us”, or “our”) recommends that you read this MD&A in conjunction with our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the fiscal year ended June 30, 2018 filed with the Securities and Exchange Commission (the “SEC”) on August 9, 2018.

 

This MD&A contains forward-looking information.  You should review our important note about forward-looking statements following this MD&A.

 

We refer to “GSR,” “NSR,” “NVR,” “metal stream (or “stream”)” and other types of royalty or similar interests throughout this MD&A.  These terms are defined in our Fiscal 2018 10-K.

 

Statement Regarding Third Party Information

 

Royal Gold does not own, develop, or mine the properties on which it holds stream or royalty interests, except for our interest in the Peak Gold, LLC joint venture (“Peak Gold JV”) as described further in this report.  Certain information provided in this report, including the Operator’s Production Estimates by Stream and Royalty Interest for Calendar 2018 (or Calendar 2019) and Property Developments, has been provided to us by the operators of properties where we own interests or is publicly available information filed by these operators with applicable securities regulatory bodies, including the SEC.  Royal Gold has not verified, and is not in a position to verify, and expressly disclaims any responsibility for, the accuracy, completeness or fairness of such third-party information and refers the reader to the public reports filed by the operators for information regarding those properties.

 

Overview

 

Royal Gold, together with its subsidiaries, is engaged in the business of acquiring and managing metal streams, royalties, and similar interests.  We seek to acquire existing stream and royalty interests or to finance projects that are in production or in the development stage in exchange for stream or royalty interests.

 

We manage our business under two segments:

 

Acquisition and Management of Stream Interests — A metal stream is a purchase agreement that provides, in exchange for an upfront deposit payment, the right to purchase all or a portion of one or more metals produced from a mine, at a price determined for the life of the transaction by the purchase agreement.  As of December 31, 2018, we owned stream interests on five producing properties and one development stage property.  Stream interests accounted for approximately 69% of our total revenue for the three and six months ended December 31, 2018 and 2017.  We expect stream interests to continue representing a significant proportion of our total revenue.

 

Acquisition and Management of Royalty Interests — Royalties are non-operating interests in mining projects that provide the right to revenue or metals produced from the project after deducting specified costs, if any.  As of December 31, 2018, we owned royalty interests on 36 producing properties,  16 development stage properties and 133 exploration stage properties, of which we consider 56 to be evaluation stage projects.  We use “evaluation stage” to describe exploration stage properties that contain mineralized material and on which operators are engaged in the search for reserves.  Royalties accounted for approximately 31% of our total revenue for the three and six months ended December 31, 2018 and 2017. 

 

We do not conduct mining operations on the properties in which we hold stream and royalty interests, and except for our interest in the Peak Gold JV, we generally are not required to contribute to capital costs, exploration costs, environmental costs or other operating costs on those properties.

 

In the ordinary course of business, we engage in a continual review of opportunities to acquire existing stream and royalty interests, to establish new streams on operating mines, to create new stream and royalty interests through the financing of

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mine development or exploration, or to acquire companies that hold stream and royalty interests.  We currently, and generally at any time, have acquisition opportunities in various stages of active review, including, for example, our engagement of consultants and advisors to analyze particular opportunities, our analysis of technical, financial and other confidential information of particular opportunities, submission of indications of interest and term sheets, participation in preliminary discussions and negotiations and involvement as a bidder in competitive processes.

 

Our financial results are primarily tied to the price of gold and, to a lesser extent, the price of silver and copper, together with the amounts of production from our producing stage stream and royalty interests.  The price of gold, silver, copper and other metals has fluctuated widely in recent years.  The marketability and the price of metals are influenced by numerous factors beyond the control of the Company and significant declines in the price of gold, silver or copper could have a material and adverse effect on the Company’s results of operations and financial condition.

 

For the three and six months ended December 31, 2018 and 2017, gold, silver and copper price averages and percentage of revenue by metal were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

December 31, 2018

 

December 31, 2017

 

December 31, 2018

 

December 31, 2017

Metal

    

Average
Price

    

Percentage
of Revenue

    

Average
Price

    

Percentage
of Revenue

    

Average
Price

    

Percentage
of Revenue

    

Average
Price

    

Percentage
of Revenue

Gold ($/ounce)

 

$

1,226

 

75%

 

$

1,275

 

79%

 

$

1,220

 

76%

 

$

1,277

 

78%

Silver ($/ounce)

 

$

14.54

 

10%

 

$

16.73

 

9%

 

$

14.78

 

10%

 

$

16.78

 

9%

Copper ($/pound)

 

$

2.80

 

11%

 

$

3.09

 

9%

 

$

2.78

 

8%

 

$

2.98

 

9%

Other

 

 

N/A

 

4%

 

 

N/A

 

3%

 

 

N/A

 

6%

 

 

N/A

 

4%

 

Recent Business Developments

 

Voisey’s Bay

 

The royalty on production of nickel, copper, cobalt and other minerals from the Voisey’s Bay mine in Newfoundland and Labrador, Canada is directly owned by the Labrador Nickel Royalty Limited Partnership (“LNRLP”), in which the Company’s wholly-owned indirect subsidiary is the general partner and 90% owner. The remaining 10% interest in LNRLP is owned by a subsidiary of Altius Minerals Corporation (“Altius”).

 

On September 13, 2018, LNRLP entered into an agreement with Vale Canada Limited and certain of its subsidiaries (collectively, the “Parties”) to comprehensively settle their long-standing litigation related to calculation of the royalty on the sale of all concentrates produced from the Voisey’s Bay mine.    

 

The Parties agreed to a new method for calculating the royalty in respect of concentrates processed at Vale’s Long Harbour Processing Plant (“LHPP”), which will be effective for all Voisey’s Bay mine production after April 1, 2018.  Under the terms of the settlement, Royal Gold expects the 3% royalty rate will apply to approximately 50% of the gross metal value in the concentrates at the nickel, copper and cobalt prices prevailing at the time of settlement.  As those metal prices rise or fall, the percentage of gross metal value in the concentrates applicable to the royalty would correspondingly increase or decrease.

 

The LHPP is designed to produce 50,000 tonnes of finished nickel annually.  The plant is currently ramping up and has produced at an average quarterly rate of approximately 8,600 tonnes of finished nickel during the June and September 2018 quarters, which is approximately 70% of LHPP’s design capacity.  In the next few years, Voisey’s Bay concentrate will provide 100% of the feed to LHPP but, over time, other sources of concentrate will be added to LHPP.

 

Vale announced it will recommence the $1.7 billion development of an underground mine and associated facilities, which is expected to extend the Voisey’s Bay mine life until 2034. Vale expects the underground mine to begin production in 2021 and to ramp up over four years, while the current open pit mining in the Ovoid deposit is expected to continue until 2022.  Vale estimates Voisey's Bay mineral reserves at 32.4 million tonnes with a nickel grade of 2.13%, a copper grade of 0.96%, and a cobalt grade of 0.13% as of December 31, 2017.

 

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During the three and six months ended December 31, 2018, the Company recognized approximately $2.5 million and $7.5 million (each period includes the 10% non-controlling interest), respectively, in royalty revenue attributable to the Voisey’s Bay royalty.  Royalty revenue recognized on the Voisey’s Bay royalty for the quarter ended September 30, 2018 was attributable to metal production from the June 30 and September 30, 2018 quarters.  Royalty payments for each quarter are due 45 days after quarter-end.  The Company anticipates recognizing revenue for the Voisey’s Bay royalty in the period in which metal production occurs, based on information provided by the operator.  If information is not received timely from the operator, the Company may estimate Voisey’s Bay royalty revenue based on available or historical information.  Refer to Note 4 of our notes to consolidated financial statements for further discussion on our revenue recognition.

 

Peak Gold JV

 

On September 24, 2018, the Company announced that the Peak Gold JV, of which our Royal Alaska, LLC subsidiary owns a 40% interest, completed a Preliminary Economic Assessment (“PEA”) on the Peak Gold Project located near Tok, Alaska.  The PEA contemplates on a preliminary basis an open pit mining operation with positive economics at base case gold and silver prices.  The Company has engaged an external advisor to assist in identifying options with respect to our interests in the Peak Gold Project. 

 

Royal Gold also owns two net smelter return royalties on the Peak Gold Project.

 

Acquisition of Contango Ore, Inc. Common Stock

 

On October 3, 2018, the Company purchased the second and final tranche of Contango Ore, Inc. (“CORE”) common stock (127,188 shares) for $26 per share.  As previously reported in our Fiscal 2018 10-K, the Company purchased 682,556 shares of CORE common stock at $26 per share in June 2018.  As of December 31, 2018, the Company owns 809,744 shares of CORE common stock. 

 

Principal Stream and Royalty Interests

 

The Company considers both historical and future potential revenues in determining which stream and royalty interests in our portfolio are principal to our business.  Estimated future potential revenues from both producing and development properties are based on a number of factors, including reserves subject to our stream and royalty interests, production estimates, feasibility studies, metal price assumptions, mine life, legal status and other factors and assumptions, any of which could change and could cause the Company to conclude that one or more of such stream and royalty interests are no longer principal to our business.  Currently, our principal producing stream and royalty interests are listed alphabetically in the following table.

 

Please refer to our Fiscal 2018 10-K for further discussion of our principal producing stream and royalty interests.

 

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Principal Producing Properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stream or royalty interests

Mine

 

Location

 

Operator

 

(Gold unless otherwise stated)

Andacollo

    

Region IV, Chile

    

Compañía Minera Teck Carmen de Andacollo (“Teck”)

    

Gold stream - 100% of gold produced (until 900,000 ounces delivered; 50% thereafter)

Cortez

 

Nevada, USA

 

Barrick Gold Corporation ("Barrick")

 

GSR1: 0.40% to 5.0% sliding-scale GSR

 

 

 

 

 

 

GSR2: 0.40% to 5.0% sliding-scale GSR

 

 

 

 

 

 

GSR3: 0.71% GSR

 

 

 

 

 

 

NVR1: 4.91% NVR; 4.52% NVR (Crossroads)

Mount Milligan

 

British Columbia, Canada

 

Centerra Gold Inc. ("Centerra")

 

Gold stream - 35.00% of payable gold

 

 

 

 

 

 

Copper stream - 18.75% of payable copper

Peñasquito

 

Zacatecas, Mexico

 

Goldcorp Inc. (“Goldcorp”)

 

2.0% NSR (gold, silver, lead, zinc)

Pueblo Viejo

 

Sanchez Ramirez, Dominican Republic

 

Barrick (60%)

 

Gold stream - 7.5% of gold produced (until 990,000 ounces delivered; 3.75% thereafter)

 

 

 

 

 

 

Silver stream - 75% of silver produced (until 50.0 million ounces delivered; 37.5% thereafter)

Wassa and Prestea(1)

 

Western Region of Ghana

 

Golden Star Resources Ltd. (“Golden Star”)

 

Gold stream - 10.5% of gold produced


(1)

Gold stream percentage increased to 10.5% from 9.25% effective January 1, 2018.

 

Operators’ Production Estimates by Stream and Royalty Interest for Calendar 2018

 

We generally receive annual production estimates from many of the operators of our producing mines during the first quarter of each calendar year.  In some instances, an operator may revise their original calendar year guidance.  The following table shows current production estimates for our principal producing properties for calendar 2018 as well as the actual production reported to us by the various operators through December 31, 2018.  The estimates and production reports are prepared by the operators of the mining properties.  We do not participate in the preparation or calculation of the operators’ estimates or production reports and have not independently assessed or verified, and disclaim all responsibility for, the accuracy of such information.  Please refer to “Property Developments” below within this MD&A for further discussion on our principal producing and development stage properties.

 

Operators’ Estimated and Actual Production by Stream and Royalty Interest for Calendar 2018

Principal Producing Properties    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Calendar 2018 Operator’s Production Estimate

 

Calendar 2018 Operator’s Production

 

 

Estimate(1)

 

Actual(2)

 

 

Gold

 

Silver

 

Base Metals

 

Gold

 

Silver

 

Base Metals

Stream/Royalty

    

(oz.)

  

(oz.)

  

(lbs.)

  

(oz.)

  

(oz.)

  

(lbs.)

Stream:

 

 

 

 

 

 

 

 

 

 

 

 

Andacollo(3)

  

66,700

  

 

  

 

  

59,600

  

 

  

 

Mount Milligan(4)

 

175,000 - 195,000

 

 

 

 

 

195,000

 

 

 

 

Copper

 

 

 

 

 

40 - 47 million

 

 

 

 

 

47.1 million

Pueblo Viejo(5)

 

575,000 - 590,000

 

Not provided

 

 

 

581,000

 

Not provided

 

 

Wassa and Prestea(6)

 

225,000 - 235,000

 

 

 

 

 

224,900

 

 

 

 

Royalty:

 

 

 

 

 

 

 

 

 

 

 

 

Cortez GSR1

 

48,300

 

 

 

 

 

44,600

 

 

 

 

Cortez GSR2

 

2,200

 

 

 

 

 

5,200

 

 

 

 

Cortez GSR3

 

50,500

 

 

 

 

 

49,800

 

 

 

 

Cortez NVR1

 

31,600

 

 

 

 

 

36,600

 

 

 

 

Peñasquito(7)

 

310,000

 

Not provided

 

 

 

220,000

 

14.1 million

 

 

Lead

 

  

 

  

 

160 million

 

 

 

 

 

82.5 million

Zinc

 

  

 

  

 

300 million

 

 

 

 

 

225.9 million

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(1)

Production estimates received from our operators are for calendar 2018.  Please refer to our cautionary statement regarding third party information at the beginning of this MD&A.  There can be no assurance that production estimates received from our operators will be achieved.  Please also refer to our cautionary language regarding forward-looking statements following this MD&A, as well as the Risk Factors identified in Part I, Item 1A, of our Fiscal 2018 10-K for information regarding factors that could affect actual results.

 

(2)

Actual production figures shown are from our operators and cover the period January 1, 2018 through December 31, 2018, unless otherwise noted in footnotes to this table.

 

(3)

The estimated and actual production figures shown for Andacollo are contained gold in concentrate.

 

(4)

The estimated and actual production figures shown for Mount Milligan are payable gold and copper in concentrate.  

 

(5)

The estimated and actual production figures shown for Pueblo Viejo are payable gold in doré and represent Barrick’s 60% interest in Pueblo Viejo.  The operator did not provide estimated or actual silver production.

 

(6)

The estimated and actual production figures shown for Wassa and Prestea are payable gold in doré.

 

(7)

The estimated and actual gold production figures shown for Peñasquito are payable gold in concentrate and doré.  The estimated and actual lead and zinc production figures shown are payable lead and zinc in concentrate. The operator did not provide estimated annual silver production, and the actual silver production figure shown is payable silver in concentrate and doré.  Actual production shown is for the nine months ended September 30, 2018.  Full calendar year 2018 actual information was not available from the operator as of the date of this report. 

 

Property Developments 

 

The following property development information is provided by the operators of the property, either to Royal Gold or in various documents made publicly available.

 

Stream Interests

 

Andacollo

 

Gold stream deliveries from Andacollo were approximately 10,700 ounces of gold for the three months ended December 31, 2018, compared to approximately 13,500 ounces of gold for the three months ended December 31, 2017.  Deliveries during the current quarter were lower as a result of timing of shipments.

 

Consistent with the mine plan, Teck expects copper grades to decline toward reserve grade in calendar 2018 and future years.  Teck reports that it continues to study and pilot projects that would help partially offset the decline in grades.  The current life of mine for Andacollo is expected to continue until 2035.  Additional permitting or amendments to existing permits will be required to execute the life of mine plan.

 

Mount Milligan

 

Gold stream deliveries from Mount Milligan were approximately 10,300 ounces of gold for the three months ended December 31, 2018, compared to approximately 17,700 ounces of gold for the three months ended December 31, 2017. 

Copper stream deliveries from Mount Milligan were approximately 2.5 million pounds during the three months ended December 31, 2018, compared to approximately 2.7 million pounds during the three months ended December 31, 2017.  Decreased deliveries resulted from differences in the timing of shipments and settlements during the periods.

 

During calendar 2019, Centerra expects Mount Milligan to produce between 155,000 and 175,000 ounces of gold (compared to 195,000 actual ounces of gold in calendar 2018) and between 65 million and 75 million pounds of copper (compared to 47 million actual pounds of copper in calendar 2018).   Centerra anticipates that mill throughput will be reduced during the remainder of the winter season to properly manage the water balance until the water flow increases in the spring.  Once the spring melt has commenced, which typically occurs in April, mill throughput levels are expected to return to full capacity.  In the second half of calendar 2019, Centerra expects to achieve an average throughput of approximately 55,000 tonnes per calendar day.

 

Permit applications are in process to allow the mine to draw additional flow during the spring melt period for the next three years from each of Philip Lake, Rainbow Creek and Meadows Creek.  This additional water would be stored in the tailings storage facility for use during the remainder of the year, which is expected to allow operations to continue at a rate

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of 55,000 tonnes per calendar day.  Centerra is also completing an inventory of regional water sources to identify other potential long-term water sources that could provide additional water through to the end of the mine life.

 

Pueblo Viejo

 

Gold stream deliveries from Pueblo Viejo were approximately 10,400 ounces of gold for the three months ended December 31, 2018, compared to approximately 12,600 ounces of gold for the three months ended December 31, 2017.  Production at Pueblo Viejo was impacted by a  higher portion of carbonaceous ore, resulting in lower gold recoveries and an expected decline in ore grades for the period.   Silver stream deliveries were approximately 469,000 ounces of silver for the three months ended December 31, 2018, compared to approximately 260,200 ounces of silver for the three months ended December 31, 2017. Prior period silver deliveries were adversely impacted by timing of payments from Barrick’s third-party refiners.

 

Barrick stated that it is advancing a prefeasibility-level study  for a plant expansion at Pueblo Viejo, which could increase throughput by roughly 50% to 12 million tonnes per year, thereby allowing the mine to maintain average annual gold production of approximately 800,000 ounces after calendar 2022.  The prefeasibility study will evaluate options including the addition of a pre-oxidation heap leach pad with a capacity of eight million tonnes per year, a new mill and flotation concentrator with a capacity of four million tonnes per year, and additional tailings capacity. According to Barrick, the project has potential to convert roughly seven million ounces of mineralized material to proven and probable reserves. Barrick reports that the pilot pre-oxidation heap leach pad is now in operation, and construction of the pilot flotation circuit is well advanced, including the holding tank and thickener.  

 

Rainy River

 

Gold stream deliveries from Rainy River were approximately 4,500 ounces of gold for the three months ended December 31, 2018, compared to approximately 1,000 ounces of gold for the three months ended December 31, 2017.  Silver stream deliveries were approximately 41,700 ounces of silver for the three months ended December 31, 2018, compared to approximately 11,900 ounces of silver for the three months ended December 31, 2017.    Milling operations were initiated during the December 2017 quarter and have been ramping up production through calendar 2018.

 

New Gold Inc. (“New Gold”) reported that during the December 2018 quarter, Rainy River continued to improve its overall operational performance with quarterly gold production of approximately 77,200 ounces and calendar 2018 gold production of approximately 227,300  ounces, achieving their revised annual guidance of between 210,000 and 250,000 gold ounces. New Gold also reported that during the December 2018 quarter, mill throughput averaged approximately 20,700 tonnes per day, while achieving an average gold recovery of 89%, the best quarterly performance to-date.

 

New Gold reported that it deferred the underground mine development plan to calendar 2020.  During calendar 2019, New Gold will launch a comprehensive review that includes alternative underground mining scenarios with the overall objective of reducing capital and improving the return on investment for the underground portion of the life of mine.

 

Wassa and Prestea

 

Gold stream deliveries from Wassa and Prestea were approximately 4,700 ounces of gold for the three months ended December 31, 2018, compared to approximately 6,000 ounces of gold for the three months ended December 31, 2017.  Decreased deliveries resulted from lower production at Prestea due to slower than planned ramp-up of the underground and the completion of open pit mining at Prestea earlier in calendar 2018, which contributed to production in the prior year quarter.

 

In calendar 2019, Golden Star expects Wassa to produce at an average rate of approximately 3,500 tonnes per day moving towards a target of 4,000 tonnes per day in calendar 2020.  Golden Star reported that deep drilling continues to show positive results and studies are ongoing to decide on the optimal long-term development of Wassa, including the appropriate mining method.  A PEA is expected in the second half of calendar 2019.    

 

Golden Star reported that during the December 2018 quarter, the Prestea plant was converted to a low tonnage, high grade configuration, allowing it to efficiently treat underground production and that significant improvements were being recorded in Prestea’s lead production indicators at the end of calendar 2018.   Golden Star expects improvements in raise

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development, long hole drilling and blasting productivities to continue to bring the production rate up to the 650 tonnes per day target in calendar 2019.

 

Golden Star expects consolidated calendar 2019 gold production to range between 220,000 and 240,000 ounces. 

 

Royalty Interests

 

Cortez

 

Production attributable to our royalty interest at Cortez decreased approximately 20% over the prior year quarter, as a result of lower production subject to our royalty interests during the current quarter.  Waste stripping at Crossroads, which is subject to our NVR1 (Crossroads) and GSR2 royalty interests, is currently ongoing.  Initial ore production at Crossroads was realized during calendar 2018, which included 5.5 million tonnes of predominately heap leach ore containing approximately  62,000 ounces of gold.  Ore production at Crossroads is expected to continue ramping up into calendar 2020. 

 

Peñasquito

 

Gold and zinc production attributable to our royalty interest at Peñasquito decreased approximately 25% and 12%, respectively, lead production attributable to our royalty interest increased approximately 8%, and silver production was in line with the prior year quarter.  Goldcorp forecasted lower than historic gold recovery during the December 2018 quarter due to the carbonaceous content of the sediment ore forecasted from the Chile Colorado pit.

 

On November 29, 2018, Goldcorp announced that the first gold from the Peñasquito Pyrite Leach Project (“PLP”) was achieved, and on January 14, 2019, announced that PLP achieved commercial production in December 2018, both under budget and ahead of schedule.    Peñasquito’s PLP is expected to recover approximately 35% of the gold and 42% of the silver currently reporting to the tailings and is expected to add production of over one million ounces of gold and 45 million ounces of silver over the current life of the mine.  For calendar 2019, Goldcorp expects grades and recoveries to climb at Peñasquito as the mine benefits from completion of the multi-year waste stripping campaign in the main Peñasco pit and a full year of operation at the PLP.

 

Results of Operations

 

Quarter Ended December 31, 2018, Compared to Quarter Ended December 31, 2017

 

For the quarter ended December 31, 2018, we recorded net income attributable to Royal Gold stockholders of $23.6 million, or $0.36 per basic and diluted share, as compared to net loss attributable to Royal Gold stockholders of $14.8 million, or ($0.23) per basic and diluted share, for the quarter ended December 31, 2017.  The increase in our earnings per share was primarily attributable to a decrease in income tax expense, as discussed further below.  The decrease in our income tax expense during the current period was partially offset by a decrease in our revenue and fair value decreases on our equity securities, each discussed below.  Income tax expense was higher in the prior period due to the effects of the Tax Cuts and Jobs Act (the “Act”) and a non-cash functional currency election for income tax purposes.  The impacts of the Act and the non-cash functional currency election on our prior period income tax expense was approximately $26.4 million and $15.9 million, respectively, or $0.40 and $0.24 per basic share, respectively.  Refer to Note 7 of our notes to consolidated financial statements for further discussion on the Act.    

 

For the quarter ended December 31, 2018, we recognized total revenue of $97.6 million, which is comprised of stream revenue of $67.7 million and royalty revenue of $29.9 million at an average gold price of $1,226 per ounce, an average silver price of $14.54 per ounce and an average copper price of $2.80 per pound.  This is compared to total revenue of $114.4 million for the three months ended December 31, 2017, which was comprised of stream revenue of $79.3 million and royalty revenue of $35.1 million, at an average gold price of $1,275 per ounce, an average silver price of $16.73 per ounce and an average copper price of $3.09 per pound for the quarter ended December 31, 2017.  Revenue and the corresponding production attributable to our stream and royalty interests for the quarter ended December 31, 2018 compared to the quarter ended December 31, 2017 are as follows:

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Revenue and Reported Production Subject to Our Stream and Royalty Interests

Quarter Ended December 31, 2018 and 2017

(In thousands, except reported production ozs. and lbs.) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

December 31, 2018

 

December 31, 2017

 

 

 

 

 

 

Reported

 

 

 

Reported

Stream/Royalty

    

Metal(s)

    

Revenue

    

Production(1)

    

Revenue

    

Production(1)

Stream(2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mount Milligan

 

 

 

$

28,169

 

 

 

 

$

21,632

 

 

 

 

 

Gold

 

 

 

 

17,700

oz.

 

 

 

 

12,600

oz.

 

 

Copper

 

 

 

 

2.4

Mlbs.

 

 

 

 

1.8

Mlbs.

Pueblo Viejo

 

 

 

$

18,230

 

 

 

 

$

26,355

 

 

 

 

 

Gold

 

 

 

 

8,900

oz.

 

 

 

 

14,500

oz.

 

 

Silver

 

 

 

 

509,500

oz.

 

 

 

 

469,600

oz.

Wassa and Prestea

 

Gold

 

$

9,550

 

7,800

oz.

 

$

8,629

 

6,800

oz.

Andacollo

 

Gold

 

$

7,635

 

6,200

oz.

 

$

21,601

 

17,000

oz.

Other(3)

 

 

 

$

4,095

 

 

 

 

$

1,070

 

 

 

 

 

Gold

 

 

 

 

2,900

oz.

 

 

 

 

800

oz.

 

 

Silver

 

 

 

 

36,000

oz.

 

 

 

 

N/A

 

Total stream revenue

 

 

 

$

67,679

 

 

 

 

$

79,287

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Royalty(2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Peñasquito

 

 

 

$

4,660

 

 

 

 

$

6,190

 

 

 

 

 

Gold

 

 

 

 

53,400

oz.

 

 

 

 

71,100

oz.

 

 

Silver

 

 

 

 

5.0

Moz.

 

 

 

 

5.1

Moz.

 

 

Lead

 

 

 

 

36.1

Mlbs.

 

 

 

 

33.4

Mlbs.

 

 

Zinc

 

 

 

 

83.1

Mlbs.

 

 

 

 

94.4

Mlbs.

Cortez

 

Gold

 

$

2,335

 

19,900

oz.

 

$

2,934

 

25,000

oz.

Other(3)

 

Various

 

$

22,918

 

N/A

 

 

$

25,937

 

N/A

 

Total royalty revenue

 

 

 

$

29,913

 

 

 

 

$

35,061

 

 

 

Total Revenue

 

 

 

$

97,592

 

 

 

 

$

114,348

 

 

 


(1)

Reported production relates to the amount of metal sales subject to our stream and royalty interests for the three months ended December 31, 2018 and 2017, and may differ from the operators’ public reporting.

 

(2)

Refer to “Property Developments” above for further discussion on our principal stream and royalty interests.

 

(3)

Individually, no stream or royalty included within the “Other” category contributed greater than 5% of our total revenue for either period.  The “Other” category for streams is only our Rainy River gold and silver stream.

 

The decrease in our total revenue for the three months ended December 31, 2018, compared with the three months ended December 31, 2017, resulted primarily from a decrease in our stream revenue and a decrease in the average gold, silver and copper prices.  The decrease in our stream revenue was primarily attributable to a decrease in gold sales at Andacollo and Pueblo Viejo due to the timing of deliveries.  This decrease was partially offset by higher gold and copper sales at Mount Milligan. 

 

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Gold and silver ounces and copper pounds purchased and sold during the three months ended December 31, 2018 and 2017, and gold and silver ounces and copper pounds in inventory as of December 31, 2018, and June 30, 2018, for our streaming interests were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

As of

 

As of

 

 

December 31, 2018

 

December 31, 2017

 

December 31, 2018

 

June 30, 2018

Gold Stream

    

Purchases (oz.)

    

Sales (oz.)

    

Purchases (oz.)

    

Sales (oz.)

    

Inventory (oz.)

    

Inventory (oz.)

Andacollo

 

10,700

 

6,200

 

13,500

 

17,000

 

4,500

 

7,400

Pueblo Viejo

 

10,400

 

8,900

 

12,600

 

14,500

 

10,400

 

9,200

Mount Milligan

 

10,300

 

17,700

 

17,700

 

12,700

 

 —

 

300

Wassa and Prestea

 

4,700

 

7,900

 

6,000

 

6,800

 

700

 

3,900

Rainy River

 

4,500

 

2,900

 

1,000

 

800

 

1,600

 

800

Total

 

40,600

 

43,600

 

50,800

 

51,800

 

17,200

 

21,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

As of

 

As of

 

 

December 31, 2018

 

December 31, 2017

 

December 31, 2018

 

June 30, 2018

Silver Stream

    

Purchases (oz.)

    

Sales (oz.)

    

Purchases (oz.)

    

Sales (oz.)

    

Inventory (oz.)

    

Inventory (oz.)

Pueblo Viejo

 

469,000

 

509,500

 

260,200

 

469,600

 

469,000

 

540,200

Rainy River

 

41,700

 

36,000

 

11,900

 

 —

 

41,700

 

32,300

Total

 

510,700

 

545,500

 

272,100

 

469,600

 

510,700

 

572,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

As of

 

As of

 

 

December 31, 2018

 

December 31, 2017

 

December 31, 2018

 

June 30, 2018

Copper Stream

    

Purchases (Mlbs.)

    

Sales (Mlbs.)

    

Purchases (Mlbs.)

    

Sales (Mlbs.)

    

Inventory (Mlbs.)

    

Inventory (Mlbs.)

Mount Milligan

 

2.5

 

2.4

 

2.7

 

1.8

 

0.9

 

 —

 

Our royalty revenue decreased during the quarter ended December 31, 2018, compared with the quarter ended December 31, 2017, primarily due to decreased production at Peñasquito and Cortez and a decrease in the average gold, silver and copper prices.  Please refer to “Property Developments” earlier within this MD&A for further discussion on recent developments regarding properties covered by certain of our stream and royalty interests.

 

Cost of sales decreased to $18.2 million for the three months ended December 31, 2018 from $19.9 million for the three months ended December 31, 2017. The decrease was primarily due to decreased gold sales from Andacollo.  Cost of sales is specific to our stream agreements and is the result of RGLD Gold AG’s (“RGLD Gold”) purchase of gold, silver and copper for a cash payment.  The cash payment for gold from Mount Milligan is the lesser of $435 per ounce or the prevailing market price of gold when purchased, while the cash payment for our other streams is a set contractual percentage of the gold, silver or copper spot price near the date of metal delivery.

 

General and administrative expenses decreased to $7.4 million for the three months ended December 31, 2018 from $9.6 million for the three months ended December 31, 2017.  The decrease during the current quarter was primarily due to a decrease in legal costs attributable to the Voisey’s Bay royalty calculation dispute and settlement as discussed further above under “Recent Business Developments.”

 

Depreciation, depletion and amortization decreased to $38.8 million for the three months ended December 31, 2018 from $42.0 million for the three months ended December 31, 2017.  The decrease was primarily attributable to decrease in gold sales at Andacollo and Pueblo Viejo, which resulted in a decrease in depletion of approximately $8.1 million.  This decrease was partially offset by an increase in metal sales at Mount Milligan and Rainy River, which resulted in an increase in depletion of approximately $4.1 million

 

On July 1, 2018, the Company adopted new Accounting Standards Update (“ASU”) guidance which impacts how we recognize changes in fair value on our equity securities at each reporting period.  As a result of the new ASU guidance, the Company recognized a loss on changes in fair value of equity securities of $3.6 million for the three months ended December 31, 2018.  Refer to Note 1 of our notes to consolidated financial statements for further detail.  The new guidance could increase our earnings volatility.

 

During the three months ended December 31, 2018, we recognized an income tax benefit totaling $2.1 million compared with income tax expense of $48.4 million during the three months ended December 31, 2017.  This resulted in an effective tax rate of (10.3%) in the current period, compared with 148.5% in the quarter ended December 31, 2017.  The decrease in the effective tax rate for the three months ended December 31, 2018 was primarily related to the Company’s updated

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analysis of the tax impacts of the Act, considering all recently released U.S. Treasury regulations and IRS guidance.  Refer to Note 7 of our notes to consolidated financial statements for further discussion on the Act.

 

Six Months Ended December 31, 2018, Compared to Six Months Ended December 31, 2017

 

For the six months ended December 31, 2018, we recorded net income attributable to Royal Gold stockholders of $38.6 million, or $0.59 per basic and diluted share, as compared to net income attributable to Royal Gold stockholders of $13.9 million, or $0.21 per basic and diluted share, for the six months ended December 31, 2017.  The increase in our earnings per share was primarily attributable to a decrease in income tax expense.  The decrease in our income tax expense during the current period was partially offset by a decrease in our revenue and fair value decreases on our equity securities, each discussed below.  Income tax expense was higher in the prior period due to the effects of the Act and a non-cash functional currency election for income tax purposes.  The impacts of the Act and the non-cash functional currency election on our prior period income tax expense was approximately $26.4 million and $15.9 million, respectively, or $0.40 and $0.24 per basic share, respectively.  Refer to Note 7 of our notes to consolidated financial statements for further discussion on the Act.

 

For the six months ended December 31, 2018, we recognized total revenue of $197.6 million, which is comprised of stream revenue of $137.7 million and royalty revenue of $59.9 million at an average gold price of $1,220 per ounce, an average silver price of $14.78 per ounce and an average copper price of $2.78 per pound.  This is compared to total revenue of $226.8 million for the six months ended December 31, 2017, which was comprised of stream revenue of $158.0 million and royalty revenue of $68.8 million, at an average gold price of $1,277 per ounce, an average silver price of $16.78 per ounce and an average copper price of $2.98 per pound.  Revenue and the corresponding production attributable to our stream and royalty interests for the six months ended December 31, 2018 compared to the quarter ended December 31, 2017 are as follows:

 

Revenue and Reported Production Subject to Our Stream and Royalty Interests

Six Months Ended December 31, 2018 and 2017

(In thousands, except reported production ozs. and lbs.) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

Six Months Ended

 

 

 

 

December 31, 2018

 

December 31, 2017

 

 

 

 

 

 

 

Reported

 

 

 

 

Reported

Stream/Royalty

    

Metal(s)

    

Revenue

    

Production(1)

    

Revenue

    

Production(1)

Stream(2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pueblo Viejo

 

 

 

$

37,717

 

 

 

 

$

51,758

 

 

 

 

 

Gold

 

 

 

 

18,100

oz.

 

 

 

 

27,400

oz.

 

 

Silver

 

 

 

 

1.0

Moz.

 

 

 

 

1.0

Moz.

Mount Milligan

 

 

 

$

37,015

 

 

 

 

$

53,584

 

 

 

 

 

Gold

 

 

 

 

23,300

oz.

 

 

 

 

31,300

oz.

 

 

Copper

 

 

 

 

3.2

Mlbs.

 

 

 

 

4.4

Mlbs.

Andacollo

 

Gold

 

$

35,378

 

28,900

oz.

 

$

33,938

 

26,700

oz.

Wassa and Prestea

 

Gold

 

$

17,611

 

14,400

oz.

 

$

17,699

 

13,900

oz.

Other(3)

 

 

 

$

9,995

 

 

 

 

$

1,070

 

 

 

 

 

Gold

 

 

 

 

7,400

oz.

 

 

 

 

800

oz.

 

 

Silver

 

 

 

 

67,500

oz.

 

 

 

 

N/A

 

Total stream revenue

 

 

 

$

137,716

 

 

 

 

$

158,049

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Royalty(2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Peñasquito

 

 

 

$

8,297

 

 

 

 

$

13,986

 

 

 

 

 

Gold

 

 

 

 

103,700

oz.

 

 

 

 

205,100

oz.

 

 

Silver

 

 

 

 

9.2

Moz.

 

 

 

 

11.0

Moz.

 

 

Lead

 

 

 

 

65.9

Mlbs.

 

 

 

 

69.6

Mlbs.

 

 

Zinc

 

 

 

 

147.3

Mlbs.

 

 

 

 

186.8

Mlbs.

Cortez

 

Gold

 

$

2,939

 

26,900

oz.

 

$

5,922

 

54,900

oz.

Other(3)

 

Various

 

$

48,633

 

N/A

 

 

$

48,867

 

N/A

 

Total royalty revenue

 

 

 

$

59,869

 

 

 

 

$

68,775

 

 

 

Total revenue

 

$

197,585

 

 

 

 

$

226,824

 

 

 


(1)

Reported production relates to the amount of metal sales subject to our stream and royalty interests for the six months ended December 31, 2018 and 2017, and may differ from the operators’ public reporting.

 

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(2)

Refer to “Property Developments” above for further discussion on our principal stream and royalty interests.

 

(3)

Individually, no stream (except Rainy River) or royalty included within the “Other” category contributed greater than 5% of our total revenue for either period.  The “Other” category for streams is only our Rainy River gold and silver stream.

 

The decrease in our total revenue for the six months ended December 31, 2018, compared with the six months ended December 31, 2017, resulted primarily from a decrease in our stream revenue and a decrease in the average gold, silver and copper prices.  The decrease in our stream revenue was primarily attributable to a decrease in gold and copper sales at Mount Milligan and a decrease in gold sales at Pueblo Viejo.  These decreases were partially offset by higher metal sales at Andacollo and Rainy River.  The decrease in metal sales at Mount Milligan was anticipated based on previously announced news from Centerra and as reported earlier by the Company.

 

Gold and silver ounces and copper pounds purchased and sold during the six months ended December 31, 2018 and 2017, and gold and silver ounces and copper pounds in inventory as of December 31, 2018, and June 30, 2018, for our streaming interests were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

Six Months Ended

 

As of

 

As of

 

 

December 31, 2018

 

December 31, 2017

 

December 31, 2018

 

June 30, 2018

Gold Stream

    

Purchases (oz.)

    

Sales (oz.)

    

Purchases (oz.)

    

Sales (oz.)

    

Inventory (oz.)

    

Inventory (oz.)

Andacollo

 

26,000

 

28,900

 

26,500

 

26,700

 

4,500

 

7,400

Mount Milligan

 

23,000

 

23,300

 

36,400

 

31,300

 

 —

 

300

Pueblo Viejo

 

19,300

 

18,100

 

23,100

 

27,400

 

10,400

 

9,200

Wassa and Prestea

 

11,200

 

14,300

 

13,400

 

13,900

 

700

 

3,900

Rainy River

 

8,100

 

7,400

 

1,000

 

800

 

1,600

 

800

Total

 

87,600

 

92,000

 

100,400

 

100,100

 

17,200

 

21,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

Six Months Ended

 

As of

 

As of

 

 

December 31, 2018

 

December 31, 2017

 

December 31, 2018

 

June 30, 2018

Silver Stream

    

Purchases (oz.)

    

Sales (oz.)

    

Purchases (oz.)

    

Sales (oz.)

    

Inventory (oz.)

    

Inventory (oz.)

Pueblo Viejo

 

978,400

 

1,049,700

 

730,200

 

1,006,200

 

469,000

 

540,200

Rainy River

 

76,900

 

67,400

 

11,900

 

 —

 

41,700

 

32,300

Total

 

1,055,300

 

1,117,100

 

742,100

 

1,006,200

 

510,700

 

572,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

Six Months Ended

 

As of

 

As of

 

 

December 31, 2018

 

December 31, 2017

 

December 31, 2018

 

June 30, 2018

Copper Stream

    

Purchases (Mlbs.)

    

Sales (Mlbs.)

    

Purchases (Mlbs.)

    

Sales (Mlbs.)

    

Inventory (Mlbs.)

    

Inventory (Mlbs.)

Mount Milligan

 

4.2

 

3.2

 

5.3

 

4.4

 

0.9

 

 —

 

Cost of sales decreased to $34.7 million for the six months ended December 31, 2018 from $40.3 million for the six months ended December 31, 2017. The decrease was primarily due to decreased gold sales from Mount Milligan and Pueblo Viejo, partially offset by an increase in gold sales at Rainy River.  Cost of sales is specific to our stream agreements and is the result of RGLD Gold’s purchase of gold, silver and copper for a cash payment.  The cash payment for gold from Mount Milligan is the lesser of $435 per ounce or the prevailing market price of gold when purchased, while the cash payment for our other streams is a set contractual percentage of the gold, silver or copper (Mount Milligan) spot price near the date of metal delivery.

 

On July 1, 2018, the Company adopted new ASU guidance which impacts how we recognize changes in fair value on our equity securities at each reporting period.  As a result of the new ASU guidance, the Company recognized a loss on changes in fair value of equity securities of $5.1 million for the six months ended December 31, 2018.  Refer to Note 1 of our notes to consolidated financial statements for further detail.  The new guidance could increase our earnings volatility.

 

Interest and other expense decreased to $15.3 million for the six months ended December 31, 2018, from $17.7 million for the six months ended December 31, 2017.  The decrease was primarily attributable to lower interest expense as a result of a decrease in amounts outstanding under our revolving credit facility.  The Company repaid the remaining amounts outstanding on the revolving credit facility during fiscal year 2018.

 

During the six months ended December 31, 2018, we recognized income tax expense totaling $2.0 million compared with income tax expense of $55.9 million during the six months ended December 31, 2017.  This resulted in an effective tax rate of 5.3% in the current period, compared with 83.9% during the six months ended December 31, 2017.  The decrease in the effective tax rate for the six months ended December 31, 2018 was primarily related to the Company’s updated

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analysis of the tax impacts of the Act, considering all recently released U.S. Treasury regulations and IRS guidance.  Refer to Note 7 of our notes to consolidated financial statements for further discussion on the Act.

 

Liquidity and Capital Resources

 

Overview

 

At December 31, 2018, we had current assets of $203.7 million compared to current liabilities of $37.2 million resulting in working capital of $166.5 million and a current ratio of 5 to 1.  This compares to current assets of $125.8 million and current liabilities of $51.4 million at June 30, 2018, resulting in working capital of $74.4 million and a current ratio of approximately 2 to 1.  The increase in our current ratio was primarily attributable to an increase in our cash and equivalents, which is discussed further below under “Summary of Cash Flows.”

 

During the quarter ended December 31, 2018, liquidity needs were met from $79.4 million in net revenue and our available cash resources.  As of December 31, 2018, the Company had no amounts outstanding and  $1 billion available under its revolving credit facility.  Working capital, combined with the Company’s undrawn revolving credit facility, resulted in approximately $1.2 billion of total liquidity at December 31, 2018.  The Company was in compliance with each financial covenant under the revolving credit facility as of December 31, 2018.  Refer to Note 3 of our notes to consolidated financial statements for further discussion on our debt.

 

We believe that our current financial resources and funds generated from operations will be adequate to cover anticipated expenditures for debt service, general and administrative expense costs and capital expenditures for the foreseeable future.  Our current financial resources are also available to fund dividends and for acquisitions of stream and royalty interests.  Our long-term capital requirements are primarily affected by our ongoing acquisition activities.  The Company currently, and generally at any time, has acquisition opportunities in various stages of active review.  In the event of one or more substantial stream and royalty interest or other acquisitions, we may seek additional debt or equity financing as necessary.

 

Please refer to our risk factors included in Part 1, Item 1A of our Fiscal 2018 10-K and in Part II, Item 1A of this Quarterly Report on Form 10-Q for a discussion of certain risks that may impact the Company’s liquidity and capital resources.

 

Summary of Cash Flows

 

Operating Activities

 

Net cash provided by operating activities totaled $103.5 million for the six months ended December 31, 2018, compared to $147.2 million for the six months ended December 31, 2017.  The decrease is primarily due to higher income taxes paid of $20.6 million over the prior quarter and a decrease in proceeds received from our stream and royalty interests, net of production taxes and cost of sales, of approximately $20.5 million.    The increase in cash taxes paid during the current period is primarily attributable to an increase in required estimated tax payments made to various taxing authorities and an increase in prior fiscal year earnings at certain foreign subsidiaries, which corresponding tax payments were made within the current period. 

 

Investing Activities

 

Net cash used in investing activities totaled $3.7 million for the six months ended December 31, 2018, compared $0.1 million for the six months ended December 31, 2017.  The increase in cash used investing activities is primarily due to additional CORE common stock purchased during the current period.

 

Financing Activities

 

Net cash used in financing activities totaled $32.0 million for the six months ended December 31, 2018, compared to $134.9 million for the six months ended December 31, 2017.  The decrease in cash used in financing activities is primarily due to a  decrease in repayments on our revolving credit facility.  The Company repaid the remaining amounts outstanding on the revolving credit facility during fiscal year 2018. 

 

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Recently Issued or Adopted Accounting Standards and Critical Accounting Policies

 

Refer to Note 1 of our notes to consolidated financial statements for further discussion on any recently issued or adopted accounting standards.  Refer to our Fiscal 2018 10-K for discussion on our critical accounting policies.

 

Forward-Looking Statements

 

Cautionary “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995:  With the exception of historical matters, the matters discussed in this Quarterly Report on Form 10-Q are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from projections or estimates contained herein.  Such forward-looking statements include, without limitation, statements regarding projected production estimates and estimates pertaining to timing and commencement of production from the operators of properties where we hold stream and royalty interests; statements related to ongoing developments and expected developments at properties where we hold stream and royalty interests; the impact of recently issued or adopted accounting standards; effective tax rate estimates, including the effect of recently enacted tax reform; application of the royalty on production from Voisey’s Bay to a percentage of gross metal value in concentrates; royalty revenue estimates compared to actual royalty payments; the results of the PEAs for the Peak Gold Project and the Wassa underground mine, and the results of the pre-feasibility study for the Pueblo Viejo plant expansion; the adequacy of financial resources and funds to cover anticipated expenditures for debt service, general and administrative expenses and dividends, as well as costs associated with exploration and business development and capital expenditures; expected delivery dates of gold, silver, copper and other metals; and our expectation that substantially all our revenues will be derived from stream and royalty interests.  Words such as “may,” “could,” “should,” “would,” “believe,” “estimate,” “expect,” “anticipate,” “plan,” “forecast,” “potential,” “intend,” “continue,” “project,” and variations of these words, comparable words and similar expressions generally indicate forward-looking statements, which speak only as of the date the statement is made.  Do not unduly rely on forward-looking statements. Actual results may differ materially from those expressed or implied by these forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements include, among others:

 

·

a low price environment for gold and other metal prices on which our stream and royalty interests are paid or a low price environment for the primary metals mined at properties where we hold stream and royalty interests;

 

·

the production at or performance of properties where we hold stream and royalty interests, and variation of actual performance from the production estimates and forecasts made by the operators of these properties;

 

·

the ability of operators to bring projects into production on schedule or operate in accordance with feasibility studies, including development stage mining properties, mine and mill expansion projects and other development and construction projects;

 

·

acquisition and maintenance of permits and authorizations, completion of construction and commencement and continuation of production at the properties where we hold stream and royalty interests;

 

·

challenges to mining, processing and related permits and licenses, or to applications for permits and licenses, by or on behalf of indigenous populations, non-governmental organizations or other third parties;

 

·

liquidity or other problems our operators may encounter, including shortfalls in the financing required to complete construction and bring a mine into production;

 

·

decisions and activities of the operators of properties where we hold stream and royalty interests;

 

·

hazards and risks at the properties where we hold stream and royalty interests that are normally associated with developing and mining properties, including unanticipated grade, continuity and geological, metallurgical, processing or other problems, mine operating and ore processing facility problems, pit wall or tailings dam failures, industrial accidents, environmental hazards and natural catastrophes such as drought, floods, hurricanes or earthquakes and access to sufficient raw materials, water and power;

 

·

changes in operators’ mining, processing and treatment techniques, which may change the production of minerals subject to our stream and royalty interests;

 

·

changes in the methodology employed by our operators to calculate our stream and royalty interests, or failure to make such calculations in accordance with the agreements that govern them;

 

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·

changes in project parameters as plans of the operators of properties where we hold stream and royalty interests are refined;

 

·

accuracy of and decreases in estimates of reserves and mineralization by the operators of properties where we hold stream and royalty interests;

 

·

contests to our stream and royalty interests and title and other defects in the properties where we hold stream and royalty interests;

 

·

adverse effects on market demand for commodities, the availability of financing, and other effects from adverse economic and market conditions;

 

·

future financial needs of the Company and the operators of properties where we hold stream or royalty interests;

 

·

federal, state and foreign legislation governing us or the operators of properties where we hold stream and royalty interests;

 

·

the availability of stream and royalty interests for acquisition or other acquisition opportunities and the availability of debt or equity financing necessary to complete such acquisitions;

 

·

our ability to make accurate assumptions regarding the valuation, timing and amount of revenue to be derived from our stream and royalty interests when evaluating acquisitions;

 

·

risks associated with conducting business in foreign countries, including application of foreign laws to contract and other disputes, validity of security interests, governmental consents for granting interests in exploration and exploitation licenses, application and enforcement of real estate, mineral tenure, contract, safety, environmental and permitting laws, currency fluctuations, expropriation of property, repatriation of earnings, taxation, price controls, inflation, import and export regulations, community unrest and labor disputes, endemic health issues, corruption, enforcement and uncertain political and economic environments;

 

·

changes in laws governing us, the properties where we hold stream and royalty interests or the operators of such properties;

 

·

risks associated with issuances of additional common stock or incurrence of indebtedness in connection with acquisitions or otherwise including risks associated with the issuance and conversion of convertible notes;

 

·

changes in management and key employees; and

 

·

failure to complete future acquisitions;

 

as well as other factors described elsewhere in this report and our other reports filed with the SEC, including our Fiscal 2018 10-K.  Most of these factors are beyond our ability to predict or control.  Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements.  Forward-looking statements speak only as of the date on which they are made.  We disclaim any obligation to update any forward-looking statements made herein, except as required by law.  Readers are cautioned not to put undue reliance on forward-looking statements.

 

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Our earnings and cash flows are significantly impacted by changes in the market price of gold and other metals.  Gold, silver, copper and other metal prices can fluctuate significantly and are affected by numerous factors, such as demand, production levels, economic policies of central banks, producer hedging, world political and economic events and the strength of the U.S. dollar relative to other currencies.  Please see “Volatility in gold, silver, copper, nickel and other metal prices may have an adverse impact on the value of our stream and royalty interests and may reduce our revenues. Certain contracts governing our stream and royalty interests have features that may amplify the negative effects of a drop in metals prices,” under Part I, Item 1A of our Fiscal 2018 10-K, for more information that can affect gold, silver, copper and other metal prices as well as historical gold, silver, copper and nickel prices.

 

During the six months ended December 31, 2018, we reported revenue of $197.6 million, with an average gold price for the period of $1,220 per ounce, an average silver price of $14.78 per ounce and an average copper price of $2.78 per pound.  Approximately 76% of our total reported revenues for the six months ended December 31, 2018 were attributable

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to gold sales from our gold producing stream and royalty interests, as shown within the MD&A.  For the six months ended December 31, 2018, if the price of gold had averaged 10% higher or lower per ounce, we would have recorded an increase or decrease in revenue of approximately $15.6 million.

 

Approximately 10% of our total reported revenues for the six months ended December 31, 2018 were attributable to silver sales from our silver producing stream and royalty interests.  For the six months ended December 31, 2018, if the price of silver had averaged 10% higher or lower per ounce, we would have recorded an increase or decrease in revenue of approximately $2.0 million.

 

Approximately 8% of our total reported revenues for the six months ended December 31, 2018 were attributable to copper sales from our copper producing stream and royalty interests.  For the six months ended December 31, 2018, if the price of copper had averaged 10% higher or lower per pound, we would have recorded an increase or decrease in revenue of approximately $2.0 million.

 

ITEM 4.     CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

As of December 31, 2018, the Company’s management, with the participation of the President and Chief Executive Officer (the principal executive officer) and Chief Financial Officer and Vice President Strategy (the principal financial and accounting officer) of the Company, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)).  Based on such evaluation, the Company’s President and Chief Executive Officer and its Chief Financial Officer and Vice President Strategy have concluded that, as of December 31, 2018, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the required time periods and that such information is accumulated and communicated to the Company’s management, including the President and Chief Executive Officer and the Chief Financial Officer and Vice President Strategy, as appropriate to allow timely decisions regarding required disclosure.

 

Disclosure controls and procedures involve human diligence and compliance and are subject to lapses in judgment and breakdowns resulting from human failures.  As a result, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

 

Changes in Internal Controls

 

There has been no change in the Company’s internal control over financial reporting during the three months ended December 31, 2018 that has materially affected, or that is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II.    OTHER INFORMATION

 

ITEM 1.      LEGAL PROCEEDINGS

 

Voisey’s Bay

 

Refer to Note 2 of our notes to consolidated financial statements for a discussion of the settlement associated with our Voisey’s Bay royalty.

 

ITEM 1A.    RISK FACTORS

 

Information regarding risk factors appears in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements,” and various risks faced by us are also discussed

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elsewhere in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q.  In addition, risk factors are included in Part I, Item 1A of our Fiscal 2018 10-K.

 

ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Not applicable.

 

ITEM 3.     DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4.     MINE SAFETY DISCLOSURE

 

Not applicable.

 

ITEM 5.     OTHER INFORMATION

 

Not applicable.

 

ITEM 6.     EXHIBITS 

 

Exhibit
Number

    

Description

31.1*

 

Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2*

 

Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1‡

 

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2‡

 

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS*

 

XBRL Instance Document.

101.SCH*

 

XBRL Taxonomy Extension Schema Document.

101.CAL*

 

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF*

 

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*

 

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*

 

XBRL Taxonomy Extension Presentation Linkbase Document.


 

*

Filed herewith.

Furnished herewith.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

ROYAL GOLD, INC. 

 

 

 

Date:  February 7, 2019

 

 

 

By:

/s/ Tony Jensen

 

 

Tony Jensen

 

 

President and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

Date:  February 7, 2019

By:

/s/ William Heissenbuttel

 

 

William Heissenbuttel

 

 

Chief Financial Officer and Vice President Strategy

 

 

(Principal Financial and Accounting Officer)

 

 

33