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 March 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 and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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    (Do not check if a smaller reporting company)

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 65,453,917 shares of the Company’s common stock, par value $0.01 per share, outstanding as of April 26, 2018.    

 

 

 

 


 

Table of Contents

 

 

INDEX

 

 

 

 

 

PAGE

 

 

 

    

 

PART I 

    

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1. 

 

Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets

 

3

 

 

Consolidated Statements of Operations and Comprehensive (Loss) Income

 

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)

 

 

 

 

 

 

 

 

 

    

March 31, 2018

    

June 30, 2017

ASSETS

 

 

 

 

 

 

Cash and equivalents

 

$

109,376

 

$

85,847

Royalty receivables

 

 

27,795

 

 

26,886

Income tax receivable

 

 

1,149

 

 

22,169

Stream inventory

 

 

12,699

 

 

7,883

Prepaid expenses and other

 

 

826

 

 

822

Total current assets

 

 

151,845

 

 

143,607

Stream and royalty interests, net (Note 2)

 

 

2,532,603

 

 

2,892,256

Other assets

 

 

68,999

 

 

58,202

Total assets

 

$

2,753,447

 

$

3,094,065

LIABILITIES

 

 

 

 

 

 

Accounts Payable

 

$

3,008

 

$

3,908

Dividends payable

 

 

16,361

 

 

15,682

Income tax payable

 

 

12,431

 

 

5,651

Withholding taxes payable

 

 

3,652

 

 

3,425

Other current liabilities

 

 

8,045

 

 

5,617

Total current liabilities

 

 

43,497

 

 

34,283

Debt (Note 3)

 

 

422,273

 

 

586,170

Deferred tax liabilities

 

 

103,221

 

 

121,330

Uncertain tax positions

 

 

36,616

 

 

25,627

Other long-term liabilities

 

 

17,435

 

 

6,391

Total liabilities

 

 

623,042

 

 

773,801

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 65,309,018 and 65,179,527 shares outstanding, respectively

 

 

653

 

 

652

Additional paid-in capital

 

 

2,188,251

 

 

2,185,796

Accumulated other comprehensive income

 

 

21

 

 

879

Accumulated (losses) earnings

 

 

(100,173)

 

 

88,050

Total Royal Gold stockholders’ equity

 

 

2,088,752

 

 

2,275,377

Non-controlling interests

 

 

41,653

 

 

44,887

Total equity

 

 

2,130,405

 

 

2,320,264

Total liabilities and equity

 

$

2,753,447

 

$

3,094,065

 

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 (Loss) Income

(Unaudited, in thousands except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For The Three Months Ended

 

For The Nine Months Ended

 

 

March 31, 

 

March 31, 

 

March 31, 

 

March 31, 

 

    

2018

    

2017

    

2018

    

2017

Revenue

 

$

115,983

 

$

106,972

 

$

342,807

 

$

331,880

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

21,345

 

 

22,419

 

 

61,627

 

 

67,582

General and administrative

 

 

8,100

 

 

5,402

 

 

24,555

 

 

23,447

Production taxes

 

 

423

 

 

389

 

 

1,568

 

 

1,331

Exploration costs

 

 

536

 

 

2,647

 

 

5,098

 

 

8,411

Depreciation, depletion and amortization

 

 

39,679

 

 

40,164

 

 

121,380

 

 

119,785

Impairment of royalty interests

 

 

239,364

 

 

 —

 

 

239,364

 

 

 —

Total costs and expenses

 

 

309,447

 

 

71,021

 

 

453,592

 

 

220,556

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

 

(193,464)

 

 

35,951

 

 

(110,785)

 

 

111,324

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

1,781

 

 

1,326

 

 

3,416

 

 

10,056

Interest and other expense

 

 

(8,294)

 

 

(9,254)

 

 

(25,946)

 

 

(27,068)

(Loss) income before income taxes

 

 

(199,977)

 

 

28,023

 

 

(133,315)

 

 

94,312

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit (expense)

 

 

 45,859

 

 

(6,492)

 

 

(10,044)

 

 

(18,724)

Net (loss) income

 

 

(154,118)

 

 

21,531

 

 

(143,359)

 

 

75,588

Net loss attributable to non-controlling interests

 

 

468

 

 

2,130

 

 

3,573

 

 

5,921

Net (loss) income attributable to Royal Gold common stockholders

 

$

 (153,650)

 

$

23,661

 

$

(139,786)

 

$

81,509

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(154,118)

 

$

21,531

 

$

(143,359)

 

$

75,588

Adjustments to comprehensive (loss) income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(666)

 

 

360

 

 

(858)

 

 

1,182

Comprehensive (loss) income

 

 

(154,784)

 

 

21,891

 

 

(144,217)

 

 

76,770

Comprehensive loss attributable to non-controlling interests

 

 

468

 

 

2,130

 

 

3,573

 

 

5,921

Comprehensive (loss) income attributable to Royal Gold stockholders

 

$

 (154,316)

 

$

24,021

 

$

(140,644)

 

$

82,691

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic (loss) earnings per share

 

$

(2.35)

 

$

0.36

 

$

(2.14)

 

$

1.25

Basic weighted average shares outstanding

 

 

65,307,324

 

 

65,169,883

 

 

65,283,019

 

 

65,145,183

Diluted (loss) earnings per share

 

$

(2.35)

 

$

0.36

 

$

(2.14)

 

$

1.25

Diluted weighted average shares outstanding

 

 

65,307,324

 

 

65,274,926

 

 

65,283,019

 

 

65,267,201

Cash dividends declared per common share

 

$

0.25

 

$

0.24

 

$

0.74

 

$

0.71

 

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

4


 

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ROYAL GOLD, INC.

Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

For The Nine Months Ended

 

 

March 31, 

 

March 31, 

 

    

2018

    

2017

Cash flows from operating activities:

 

 

 

 

 

 

Net (loss) income

 

$

(143,359)

 

$

75,588

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

121,380

 

 

119,785

Amortization of debt discount and issuance costs

 

 

11,200

 

 

10,202

Non-cash employee stock compensation expense

 

 

5,958

 

 

6,758

Impairment of  royalty interests

 

 

239,364

 

 

Deferred tax benefit

 

 

(31,583)

 

 

(6,266)

Other  

 

 

(199)

 

 

(4,638)

Changes in assets and liabilities:

 

 

 

 

 

 

Royalty receivables

 

 

(909)

 

 

(1,367)

Stream inventory

 

 

(4,816)

 

 

2,865

Income tax receivable

 

 

21,020

 

 

(6,117)

Prepaid expenses and other assets

 

 

3,224

 

 

(743)

Accounts payable

 

 

(939)

 

 

(1,641)

Income tax payable

 

 

6,779

 

 

(422)

Withholding taxes payable

 

 

227

 

 

(5,449)

Uncertain tax positions

 

 

10,989

 

 

7,341

Other liabilities

 

 

13,473

 

 

5,036

Net cash provided by operating activities

 

$

251,809

 

$

200,932

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Acquisition of stream and royalty interests

 

 

(1,012)

 

 

(203,721)

Other

 

 

(1,251)

 

 

1,503

Net cash used in investing activities

 

$

(2,263)

 

$

(202,218)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Borrowings from revolving credit facility

 

 

 —

 

 

70,000

Repayment of revolving credit facility

 

 

(175,000)

 

 

(45,000)

Net payments from issuance of common stock

 

 

(3,502)

 

 

(2,618)

Common stock dividends

 

 

(47,755)

 

 

(45,715)

Purchase of additional royalty interest from non-controlling interest

 

 

 —

 

 

(1,462)

Other

 

 

240

 

 

(2,462)

Net cash used in financing activities

 

$

(226,017)

 

$

(27,257)

Net increase (decrease) in cash and equivalents

 

 

23,529

 

 

(28,543)

Cash and equivalents at beginning of period

 

 

85,847

 

 

116,633

Cash and equivalents at end of period

 

$

109,376

 

$

88,090

 

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 ISSUED AND RECENTLY ADOPTED 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 precious metals 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.  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.  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. 

 

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 nine months ended March 31, 2018, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2018.  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, 2017 filed with the Securities and Exchange Commission on August 10, 2017 (“Fiscal 2017 10-K”).

 

Certain amounts in the prior period financial statements have been reclassified for comparative purposes to conform with the presentation in the current period financial statements.  Reclassified amounts were not material to the financial statements.

 

Asset Impairment

We evaluate long‑lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts of an asset or group of assets may not be recoverable.  The recoverability of the carrying value of stream and royalty interests in production and development stage mineral properties is evaluated based upon estimated future undiscounted net cash flows from each stream and royalty interest using estimates of proven and probable reserves and other relevant information received from the operators.  We evaluate the recoverability of the carrying value of royalty interests in exploration stage mineral properties in the event of significant decreases in the price of gold, silver, copper and other metals, and whenever new information regarding the mineral properties is obtained from the operator indicating that production will not likely occur or may be reduced in the future, thus potentially affecting the future recoverability of our stream or royalty interests.  Impairments in the carrying value of each property are measured and recorded to the extent that the carrying value in each property exceeds its estimated fair value, which is generally calculated using estimated future discounted cash flows.

Estimates of gold, silver, copper, and other metal prices, operators’ estimates of proven and probable reserves or mineralized material related to our stream or royalty properties, and operators’ estimates of operating and capital costs are subject to certain risks and uncertainties which may affect the recoverability of our investment in these stream and royalty interests in mineral properties.  It is possible that changes could occur to these estimates, which could adversely affect the net cash flows expected to be generated from these stream and royalty interests.  Refer to Note 2 for discussion and the results of our impairment assessments for the three and nine months ended March 31, 2018.

 

6


 

Table of Contents

ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Recently Issued and Adopted Accounting Standards

 

Recently Issued

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) guidance for the recognition of revenue from contracts with customers.  This ASU superseded virtually all of the existing revenue recognition guidance under U.S. GAAP.  The core principle of the five step model is that an entity will recognize revenue when it transfers control of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. Entities can choose to apply the standard using either the full retrospective approach or a modified retrospective approach.  The standard is effective for the Company’s fiscal year beginning July 1, 2018.  Early adoption is permitted.

 

We plan to implement the new ASU revenue recognition guidance as of July 1, 2018, using the modified retrospective method with the cumulative effect, if any, of initial adoption to be recognized in Accumulated (losses) earnings at the date of initial application.  We are in the final stages of our evaluation of the impact of the new standard on our accounting policies, processes, and financial reporting.  Based on the evaluation performed to-date, we expect to identify similar performance obligations as compared with deliverables and separate units of account previously identified.  We will continue to assess the impact of adopting this ASU throughout the remainder of fiscal year 2018.

 

Recently Adopted

 

In March 2016, the FASB issued ASU guidance related to stock-based compensation.  The new guidance simplifies the accounting for stock-based compensation transactions, including income tax consequences, statement of cash flows presentation, estimating forfeitures when calculating compensation expense, and classification of awards as either equity or liabilities. 

 

The new standard requires all excess tax benefits and tax deficiencies to be recognized as income tax benefit (expense) in the income statement.  The new guidance also requires presentation of excess tax benefits as an operating activity on the statement of cash flows rather than a financing activity and requires presentation of cash paid to a tax authority when shares are withheld to satisfy the employer’s statutory income tax withholding obligation as a financing activity.  The new guidance also provides for an election to account for forfeitures of stock-based compensation. 

 

The Company adopted the ASU guidance effective July 1, 2017.  With respect to the forfeiture election, the Company will continue its current practice of estimating forfeitures when calculating compensation expense.  The adoption of this standard did not have a material impact on the Company’s consolidated financial statements or related disclosures.

 

 

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Table of Contents

ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

2.    STREAM AND ROYALTY INTERESTS, NET

 

The following tables summarize the Company’s stream and royalty interests, net as of March 31, 2018 and June 30, 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

    

Cost

    

Accumulated Depletion

    

Impairments

 

Net

Production stage stream interests:

 

 

 

 

 

 

 

 

 

 

 

 

Mount Milligan

 

$

790,635

 

$

(143,370)

 

$

 —

 

$

647,265

Pueblo Viejo

 

 

610,404

 

 

(101,193)

 

 

 —

 

 

509,211

Andacollo

 

 

388,182

 

 

(53,916)

 

 

 —

 

 

334,266

Wassa and Prestea

 

 

146,475

 

 

(39,383)

 

 

 —

 

 

107,092

Rainy River

 

 

175,727

 

 

(2,354)

 

 

 —

 

 

173,373

Total production stage stream interests

 

 

2,111,423

 

 

(340,216)

 

 

 —

 

 

1,771,207

Production stage royalty interests:

 

 

 

 

 

 

 

 

 

 

 

 

Voisey's Bay

 

 

205,724

 

 

(85,671)

 

 

 —

 

 

120,053

Peñasquito

 

 

99,172

 

 

(37,636)

 

 

 —

 

 

61,536

Holt

 

 

34,612

 

 

(20,868)

 

 

 —

 

 

13,744

Cortez

 

 

20,878

 

 

(11,230)

 

 

 —

 

 

9,648

Other

 

 

483,795

 

 

(357,918)

 

 

 —

 

 

125,877

Total production stage royalty interests

 

 

844,181

 

 

(513,323)

 

 

 —

 

 

330,858

Total production stage stream and royalty interests

 

 

2,955,604

 

 

(853,539)

 

 

 —

 

 

2,102,065

 

 

 

 

 

 

 

 

 

 

 

 

 

Development stage stream interests:

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

12,038

 

 

 —

 

 

 —

 

 

12,038

 

 

 

 

 

 

 

 

 

 

 

 

 

Development stage royalty interests:

 

 

 

 

 

 

 

 

 

 

 

 

Cortez

 

 

59,803

 

 

 —

 

 

 —

 

 

59,803

Other

 

 

63,810

 

 

 —

 

 

(284)

 

 

63,526

Total development stage royalty interests

 

 

123,613

 

 

 —

 

 

(284)

 

 

123,329

Total development stage stream and royalty interests

 

 

135,651

 

 

 —

 

 

(284)

 

 

135,367

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

3,625,506

 

$

(853,539)

 

$

(239,364)

 

$

2,532,603

 

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Table of Contents

ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2017 (Amounts in thousands):

    

Cost

    

Accumulated Depletion

    

Impairments

 

Net

Production stage stream interests:

 

 

 

 

 

 

 

 

 

 

 

 

Mount Milligan

 

$

790,635

 

$

(114,327)

 

$

 —

 

$

676,308

Pueblo Viejo

 

 

610,404

 

 

(67,149)

 

 

 —

 

 

543,255

Andacollo

 

 

388,182

 

 

(39,404)

 

 

 —

 

 

348,778

Wassa and Prestea

 

 

146,475

 

 

(22,715)

 

 

 —

 

 

123,760

Total production stage stream interests

 

 

1,935,696

 

 

(243,595)

 

 

 —

 

 

1,692,101

Production stage royalty interests:

 

 

 

 

 

 

 

 

 

 

 

 

Voisey's Bay

 

 

205,724

 

 

(85,671)

 

 

 —

 

 

120,053

Peñasquito

 

 

99,172

 

 

(34,713)

 

 

 —

 

 

64,459

Holt

 

 

34,612

 

 

(19,669)

 

 

 —

 

 

14,943

Cortez

 

 

20,873

 

 

(10,633)

 

 

 —

 

 

10,240

Other

 

 

483,643

 

 

(337,958)

 

 

 —

 

 

145,685

Total production stage royalty interests

 

 

844,024

 

 

(488,644)

 

 

 —

 

 

355,380

Total production stage stream and royalty interests

 

 

2,779,720

 

 

(732,239)

 

 

 —

 

 

2,047,481

Development stage stream interests:

 

 

 

 

 

 

 

 

 

 

 

 

Rainy River

 

 

175,727

 

 

 —

 

 

 —

 

 

175,727

Other

 

 

12,031

 

 

 —

 

 

 —

 

 

12,031

Total development stage stream interests

 

 

187,758

 

 

 —

 

 

 —

 

 

187,758

Development stage royalty interests:

 

 

 

 

 

 

 

 

 

 

 

 

Cortez

 

 

59,803

 

 

 —

 

 

 —

 

 

59,803

Other

 

 

63,811

 

 

 —

 

 

 —

 

 

63,811

Total development stage royalty interests

 

 

123,614

 

 

 —

 

 

 —

 

 

123,614

Total development stage stream and royalty interests

 

 

311,372

 

 

 —

 

 

 —

 

 

311,372

 

 

 

 

 

 

 

 

 

 

 

 

 

Exploration stage royalty interests:

 

 

 

 

 

 

 

 

 

 

 

 

Pascua-Lama

 

 

416,770

 

 

 —

 

 

 —

 

 

416,770

Other

 

 

116,633

 

 

 

 

 

 

 

 

116,633

Total exploration stage royalty interests

 

 

533,403

 

 

 —

 

 

 —

 

 

533,403

Total stream and royalty interests, net

 

$

3,624,495

 

$

(732,239)

 

$

 —

 

$

2,892,256

 

 

Impairment of royalty interests

 

In accordance with our impairment accounting policy discussed in Note 1, impairments in the carrying value of each stream or royalty interest are measured and recorded to the extent that the carrying value in each stream or royalty interest exceeds its estimated fair value, which is generally calculated using estimated future discounted cash-flows.  As part of the Company’s regular asset impairment analysis, which included the presence of impairment indicators, the Company recorded impairment charges for the three and nine months ended March 31, 2018 and 2017, as summarized in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

March 31, 

 

March 31, 

 

March 31, 

 

March 31, 

 

    

2018

    

2017

    

2018

    

2017

 

 

 

(Amounts in thousands)

 

 

(Amounts in thousands)

Pascua-Lama

 

$

239,080

 

$

 —

 

$

239,080

 

$

 —

Other

 

 

284

 

 

 —

 

 

284

 

 

 —

Total impairment of royalty interests

 

$

239,364

 

$

 —

 

$

239,364

 

$

 —

 

9


 

Table of Contents

ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Pascua-Lama

 

We own a 0.78% to 5.45% sliding‑scale net smelter return (“NSR”) royalty on the Pascua‑Lama project, which straddles the border between Argentina and Chile, and is owned by Barrick Gold Corporation (“Barrick”).  The Company owns an additional royalty equivalent to 1.09% of proceeds from copper produced from the Chilean portion of the project, net of allowable deductions, sold on or after January 1, 2017.  Our royalty interests are applicable to all gold and copper production from the portion of the Pascua-Lama project lying on the Chilean side of the border. 

 

On January 18, 2018 Barrick reported that it is analyzing a revised sanction related to the Pascua-Lama project issued by Chile’s Superintendencia del Medio Ambiente (“SMA”) on January 17, 2018.  The sanction is part of a re-evaluation process ordered by Chile’s Environmental Court in 2014 and relates to historical compliance matters at the Pascua-Lama project.  According to Barrick, the SMA has not revoked Pascua-Lama’s environmental permit, but has ordered the closure of existing facilities on the Chilean side of the project, in addition to certain monitoring activities.

 

On February 6, 2018, in light of the SMA order to close surface facilities in Chile, and earlier plans to evaluate an underground mine, Barrick announced it reclassified Pascua-Lama’s proven and probable reserves, which are based on an open pit mine plan, as mineralized material.  Barrick reported further details in its year-end results on February 14, 2018 and an update on the Pascua-Lama project at its February 22, 2018 Investor Day.  A significant reduction in reserves or mineralized material are indicators of impairment. 

 

On April 23, 2018, Barrick announced that work performed to-date on the prefeasibility study for a potential underground project has been suspended, and they will focus on adjusting the project closure plan for surface infrastructure on the Chilean side of the project.  Barrick will continue to evaluate opportunities to de-risk the project while maintaining Pascua-Lama as an option for development in the future if economics improve and related risks can be mitigated. 

 

As part of the impairment determination, the fair value for Pascua-Lama was estimated by calculating the net present value of the estimated future cash-flows, subject to our royalty interest, expected to be generated by the mining of the Pascua-Lama deposits.  The Company applied a probability factor to its fair value calculation that Barrick will either proceed with an open-pit mine or an underground mine at Pascua.  The estimates of future cash flows were derived from open-pit and underground mine models developed by the Company using various information reported by Barrick.  The metal price assumptions used in the Company’s model were supported by consensus price estimates obtained by a number of industry analysts.  The future cash flows were discounted using a discount rate which reflects specific market risk factors the Company associates with the Pascua-Lama royalty interest.  Following the impairment charge during the three months ended March 31, 2018, the Pascua-Lama royalty interest has a remaining carrying value of $177.7 million as of March 31, 2018.

 

3.    DEBT

 

The Company’s non-current debt as of March 31, 2018 and June 30, 2017 consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2018

 

As of June 30, 2017

 

   

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

 

$

(15,963)

 

$

(1,653)

 

$

352,384

 

$

370,000

 

$

(25,251)

 

$

(2,646)

 

$

342,103

Revolving credit facility

 

 

75,000

 

 

 —

 

 

(5,111)

 

 

69,889

 

 

250,000

 

 

 —

 

 

(5,933)

 

 

244,067

Total debt

 

$

445,000

 

$

(15,963)

 

$

(6,764)

 

$

422,273

 

$

620,000

 

$

(25,251)

 

$

(8,579)

 

$

586,170

 

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

10


 

Table of Contents

ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

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.  Interest expense recognized on the 2019 Notes for the three and nine months ended March 31, 2018, was $6.1 million and $18.3 million, respectively, compared to $5.9 million and $17.6 million, respectively, for the three and nine months ended March 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 March 31, 2018, the Company had $75 million outstanding and $925 million available under the revolving credit facility with an interest rate on borrowings of LIBOR plus 1.50% for an all-in rate of 3.52%.  During the three and nine months ended March 31, 2018, the Company repaid $75 million and $175 million, respectively, of the outstanding borrowings under the revolving credit facility.  Royal Gold may repay borrowings under the revolving credit facility at any time without premium or penalty.  Interest expense recognized on the revolving credit facility for the three and nine months ended March 31, 2018 was $1.3 million and $4.9 million, respectively, and $2.9 million and $7.2 million for the three and nine months ended March 31, 2017, and included interest on the outstanding borrowings and the amortization of the debt issuance costs.

 

As discussed in Note 5 to the notes to consolidated financial statements in the Company’s Fiscal 2017 10-K, the Company has financial covenants associated with its revolving credit facility.  As of March 31, 2018, the Company was in compliance with each financial covenant.

 

4.    REVENUE

 

Revenue is comprised of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

March 31, 

 

March 31, 

 

March 31, 

 

March 31, 

 

    

2018

    

2017

    

2018

    

2017

 

 

 

(Amounts in thousands)

 

 

(Amounts in thousands)

Stream interests

 

$

82,979

 

$

76,597

 

$

241,028

 

$

236,108

Royalty interests

 

 

33,004

 

 

30,375

 

 

101,779

 

 

95,772

Total revenue

 

$

115,983

 

$

106,972

 

$

342,807

 

$

331,880

 

 

5.    STOCK-BASED COMPENSATION

 

The Company recognized stock-based compensation expense as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

March 31, 

 

March 31, 

 

March 31, 

 

March 31, 

 

    

2018

    

2017

    

2018

    

2017

 

 

 

(Amounts in thousands)

 

 

(Amounts in thousands)

Stock options

 

$

70

 

$

94

 

$

241

 

$

297

Stock appreciation rights

 

 

482

 

 

456

 

 

1,456

 

 

1,378

Restricted stock

 

 

727

 

 

800

 

 

3,041

 

 

3,004

Performance stock

 

 

284

 

 

(1,036)

 

 

1,220

 

 

2,079

Total stock-based compensation expense

 

$

1,563

 

$

314

 

$

5,958

 

$

6,758

 

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

 

11


 

Table of Contents

ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31, 

 

 

March 31, 

 

 

March 31, 

 

 

March 31, 

 

    

 

2018

    

 

2017

    

 

2018

    

 

2017

 

 

 

(Number of shares)

 

 

(Number of shares)

Stock options

 

 

 —

 

 

 —

 

 

6,858

 

 

7,200

Stock appreciation rights

 

 

 —

 

 

 —

 

 

71,262

 

 

63,340

Restricted stock

 

 

 —

 

 

 —

 

 

50,380

 

 

44,890

Performance stock

 

 

 —

 

 

 —

 

 

34,010

 

 

29,830

Total equity awards granted

 

 

 —

 

 

 —

 

 

162,510

 

 

145,260

 

As of March 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

 

 

 

 

 

 

 

$

307

 

 

1.7

Stock appreciation rights

 

 

 

 

 

 

 

 

2,703

 

 

1.9

Restricted stock

 

 

 

 

 

 

 

 

6,251

 

 

3.1

Performance stock

 

 

 

 

 

 

 

 

1,927

 

 

2.0

 

 

6.    EARNINGS PER SHARE (“EPS”)

 

Basic (loss) earnings 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 (loss) earnings 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 (loss) earnings per common share.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

March 31, 

 

March 31, 

 

March 31, 

 

March 31, 

 

    

2018

    

2017

    

2018

    

2017

 

 

 

(in thousands, except per share data)

 

 

(in thousands, except per share data)

Net (loss) income available to Royal Gold common stockholders

 

$

 (153,650)

 

$

23,661

 

$

 (139,786)

 

$

81,509

Weighted-average shares for basic EPS

 

 

65,307,324

 

 

65,169,883

 

 

65,283,019

 

 

65,145,183

Effect of other dilutive securities

 

 

 

 

105,043

 

 

 

 

122,018

Weighted-average shares for diluted EPS

 

 

65,307,324

 

 

65,274,926

 

 

65,283,019

 

 

65,267,201

Basic (loss) earnings per share

 

$

(2.35)

 

$

0.36

 

$

(2.14)

 

$

1.25

Diluted (loss) earnings per share

 

$

(2.35)

 

$

0.36

 

$

(2.14)

 

$

1.25

 

12


 

Table of Contents

ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

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.  As a result, there will be no impact to diluted earnings (loss) per share unless the share price of the Company’s common stock exceeds the conversion price of $102.67.

 

7.    INCOME TAXES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

March 31, 

 

March 31, 

 

March 31, 

 

March 31, 

 

    

2018

    

2017

    

2018

    

2017

 

 

(Amounts in thousands, except rate)

 

(Amounts in thousands, except rate)

Income tax benefit (expense)

 

$

45,859

 

$

(6,492)

 

$

(10,044)

 

$

(18,724)

Effective tax rate

 

 

22.9%

 

 

23.2%

 

 

(7.5%)

 

 

19.9%

 

The effective tax rate for the three months ended March 31, 2018 was primarily impacted by tax benefit related to the royalty impairments. The increase in the effective tax rate for the nine months ended March 31, 2018 is primarily attributable to the effects of recent U.S. tax legislation, as discussed below, and the effects of a non-cash functional currency election ($18 million expense) to file certain Canadian income tax returns in U.S. dollars, partially offset by the tax benefit related to the royalty impairments.  Prior to the functional currency election, certain deferred tax liabilities were measured on the difference between adjusted Canadian dollar acquisition cost and Canadian dollar tax basis.  These deferred tax liabilities were then marked-to market every quarter, for income tax expense (benefit) purposes, to account for changes in the Canadian dollar to U.S. dollar exchange rate.  Post-election, the applicable deferred tax liabilities will be measured on the difference between U.S. GAAP value and U.S. dollar tax basis, and eliminating volatility in the effective tax rate caused by this mark-to-market adjustment.

 

On December 22, 2017, H.R. 1, originally known as the Tax Cuts and Jobs Act (the “Act”), was enacted and is effective for tax years including January 1, 2018.  Certain other aspects of the Act are not effective for fiscal June 30 companies until July 1, 2018.

 

The Act, among other things, reduced the U.S. corporate income tax rate to 21% starting January 1, 2018.  As the Company is a fiscal year tax payer, we applied a blended U.S. federal income tax rate of approximately 28.1% for the fiscal year ending June 30, 2018.  The blended percentage was calculated on a pro-rata percentage of the number of days before and after January 1, 2018.  The Company’s U.S. federal corporate income tax rate will be 21% for the fiscal year commencing on July 1, 2018 and all future years.

 

ASC 740, Income Taxes, requires recognition of the effects of tax law changes in the period of enactment.  As a result, the Company recorded a net charge (expense) of $26.4 million during the three months ended December 31, 2017 and the nine months ended March 31, 2018.  This amount is included in Income tax benefit (expense) on our consolidated statements of operations and comprehensive (loss) income.  The tax expense consists of three components: (i) a $12.2 million charge relating to the one-time mandatory tax on the net accumulated post-1986 untaxed earnings and profits of the Company’s foreign subsidiaries, which we will elect to pay over an eight-year period, (ii) a $2.7 million benefit resulting from the re-measurement of the Company’s net deferred tax assets and liabilities, and (iii) a $16.9 million charge related to re-measurement of the U.S. income tax impacts resulting from foreign uncertain tax positions.

 

The net $26.4 million charge represents what the Company believes is a reasonable estimate of the impact of the Act.  As the net charge is based on currently available information and interpretations, which are continuing to evolve, all amounts should be considered provisional.  The Company will continue to analyze additional information and guidance related to the Act as supplemental legislation, regulatory guidance, or evolving technical interpretations become available.  The final impacts may differ from the recorded amounts as of March 31, 2018 and the Company will continue to refine such amounts within the measurement period provided by Staff Accounting Bulletin No. 118.  The Company expects to complete its analysis no later than the second quarter of fiscal year 2019.

 

 

13


 

Table of Contents

ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

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 March 31, 2018

 

As of June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

Total stream

 

 

 

 

 

 

 

 

 

 

Total stream

 

 

Stream

 

Royalty

 

 

 

 

and royalty

 

Stream

 

Royalty

 

 

 

 

and royalty

 

  

interest

  

interest

  

Impairments

  

interests, net

  

interest

  

interest

  

Impairments

  

interests, net

Canada

 

$

820,639

 

$

217,236

 

$

(284)

 

$

1,037,591

 

$

852,035

 

$

221,618

 

$

 —

 

$

1,073,653

Dominican Republic

 

 

509,211

 

 

 —

 

 

 —

 

 

509,211

 

 

543,256

 

 

 —

 

 

 —

 

 

543,256

Chile

 

 

334,266

 

 

453,306

 

 

(239,080)

 

 

548,492

 

 

348,778

 

 

453,369

 

 

 —

 

 

802,147

Africa

 

 

107,092

 

 

515

 

 

 —

 

 

107,607

 

 

123,760

 

 

572

 

 

 —

 

 

124,332

Mexico

 

 

 —

 

 

95,234

 

 

 —

 

 

95,234

 

 

 —

 

 

105,889

 

 

 —

 

 

105,889

United States

 

 

 —

 

 

167,253

 

 

 —

 

 

167,253

 

 

 —

 

 

168,378

 

 

 —

 

 

168,378

Australia

 

 

 —

 

 

35,088

 

 

 —

 

 

35,088

 

 

 —

 

 

37,409

 

 

 —

 

 

37,409

Other

 

 

12,037

 

 

20,090

 

 

 —

 

 

32,127

 

 

12,030

 

 

25,162

 

 

 —

 

 

37,192

Total

 

$

1,783,245

 

$

988,722

 

$

 (239,364)

 

$

2,532,603

 

$

1,879,859

 

$

1,012,397

 

$

 —

 

$

2,892,256

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2018

 

Three Months Ended March 31, 2017

 

    

Revenue

    

Cost of sales

    

Net revenue

    

Revenue

    

Cost of sales

    

Net revenue

Streams:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Canada

 

$

51,709

 

$

14,225

 

$

37,484

 

$

35,112

 

$

12,583

 

$

22,529

Dominican Republic

 

 

15,734

 

 

4,415

 

 

11,319

 

 

24,524

 

 

7,054

 

 

17,470

Chile

 

 

7,186

 

 

1,039

 

 

6,147

 

 

10,398

 

 

1,499

 

 

8,899

Africa

 

 

8,350

 

 

1,666

 

 

6,684

 

 

6,563

 

 

1,283

 

 

5,280

Total streams

 

$

82,979

 

$

21,345

 

$

61,634

 

$

76,597

 

$

22,419

 

$

54,178

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Royalties:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mexico

 

$

11,021

 

$

 —

 

$

11,021

 

$

10,446

 

$

 —

 

$

10,446

United States

 

 

8,459

 

 

 —

 

 

8,459

 

 

7,899

 

 

 —

 

 

7,899

Canada

 

 

6,089

 

 

 —

 

 

6,089

 

 

5,535

 

 

 —

 

 

5,535

Australia

 

 

3,343

 

 

 —

 

 

3,343

 

 

3,174

 

 

 —

 

 

3,174

Africa

 

 

543

 

 

 —

 

 

543

 

 

672

 

 

 —

 

 

672

Other

 

 

3,549

 

 

 —

 

 

3,549

 

 

2,649

 

 

 —

 

 

2,649

Total royalties

 

$

33,004

 

$

 —

 

$

33,004

 

$

30,375

 

$

 —

 

$

30,375

Total streams and royalties

 

$

115,983

 

$

21,345

 

$

94,638

 

$

106,972

 

$

22,419

 

$

84,553

 

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended March 31, 2018

 

Nine Months Ended March 31, 2017

 

    

Revenue

    

Cost of sales

    

Net revenue

    

Revenue

    

Cost of sales

    

Net revenue

Streams:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Canada

 

$

106,363

 

$

30,072

 

$

76,291

 

$

105,161

 

$

36,341

 

$

68,820

Dominican Republic

 

 

67,492

 

 

20,200

 

 

47,292

 

 

71,911

 

 

21,497

 

 

50,414

Chile

 

 

41,124

 

 

6,148

 

 

34,976

 

 

41,552

 

 

6,243

 

 

35,309

Africa

 

 

26,049

 

 

5,207

 

 

20,842

 

 

17,484

 

 

3,501

 

 

13,983

Total streams

 

$

241,028

 

$

61,627

 

$

179,401

 

$

236,108

 

$

67,582

 

$

168,526

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Royalties:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mexico

 

$

32,772

 

$

 —

 

$

32,772

 

$

31,573

 

$

 —

 

$

31,573

United States

 

 

31,186

 

 

 —

 

 

31,186

 

 

27,012

 

 

 —

 

 

27,012

Canada

 

 

17,577

 

 

 —

 

 

17,577

 

 

17,405

 

 

 —

 

 

17,405

Australia

 

 

9,891

 

 

 —

 

 

9,891

 

 

9,867

 

 

 —

 

 

9,867

Africa

 

 

1,589

 

 

 —

 

 

1,589

 

 

2,260

 

 

 —

 

 

2,260

Chile

 

 

399

 

 

 —

 

 

399

 

 

1,333

 

 

 —

 

 

1,333

Other

 

 

8,365

 

 

 —

 

 

8,365

 

 

6,322

 

 

 —

 

 

6,322

Total royalties

 

$

101,779

 

$

 —

 

$

101,779

 

$

95,772

 

$

 —

 

$

95,772

Total streams and royalties

 

$

342,807

 

$

61,627

 

$

281,180

 

$

331,880

 

$

67,582

 

$

264,298

 

 

9.    FAIR VALUE MEASUREMENTS

 

FASB Accounting Standards Codification (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 March 31, 2018

 

 

Carrying

 

Fair Value

 

    

Amount

    

Total

    

Level 1

    

Level 2

    

Level 3

Assets (In thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities(1)

 

$

3,274

 

$

3,274

 

$

3,274

 

$

 —

 

$

 —

Total assets

 

 

 

 

$

3,274

 

$

3,274

 

$

 —

 

$

 —

Liabilities (In thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt(2)

 

$

431,037

 

$

390,280

 

$

390,280

 

$

 —

 

$

 —

Total liabilities

 

 

 

 

$

390,280

 

$

390,280

 

$

 —

 

$

 —


(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 warrants that were part of the term loan funded to a subsidiary of Golden Star Resources Ltd. (“Golden Star”) in July 2015 were exercised during the quarter ended September 30, 2017.  The warrants had been classified within Level 2 of the fair value hierarchy as of June 30, 2017.  The fair value of the Golden Star common shares received by the Company upon exercise of the warrants are classified within Level 1 of the fair value hierarchy as of September 30, 2017.  The Company sold all of the common shares of Golden Star received upon exercise of the warrants in October 2017.  The Company’s debt classified within Level 1 of the fair value hierarchy is valued using quoted prices in an active market.  The carrying value of the Company’s revolving credit facility (Note 3) approximates fair value as of March 31, 2018.

 

As of March 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.  Refer to Note 2 for discussion of inputs used to develop fair value for those royalty interests that were determined to be impaired during the three months ended March 31, 2018.

 

10.COMMITMENTS AND CONTINGENCIES

 

Ilovica Gold Stream Acquisition

 

As of March 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.

 

Voisey’s Bay

 

The Company indirectly owns a royalty on the Voisey’s Bay mine in Newfoundland and Labrador owned by Vale Newfoundland & Labrador Limited (“VNL”).  The royalty is directly owned by the Labrador Nickel Royalty Limited Partnership (“LNRLP”), in which the Company’s wholly-owned indirect subsidiary, Voisey’s Bay Holding Corporation, is the general partner and 90% owner.  The remaining 10% interest in LNRLP is owned by Altius Royalty Corporation, a company unrelated to Royal Gold.

 

On October 6, 2017, LNRLP filed a Fresh as Amended Statement of Claim, amending the original October 16, 2009 Statement of Claim and amendments thereto made in December 2014, in the Supreme Court of Newfoundland and Labrador Trial Division against Vale Inco Limited, now known as Vale Canada Limited, and its wholly-owned subsidiaries, Vale Inco Atlantic Sales Limited and VNL, related to calculation of the NSR on the sale of concentrates, including nickel concentrates, from the Voisey’s Bay mine.  LNRLP asserts that the defendants have incorrectly calculated the NSR since production at Voisey’s Bay began in late 2005, and since defendants began processing Voisey’s Bay concentrates at the new Long Harbour processing facility, and that the defendants have breached their contractual duties of good faith in several ways.  LNRLP requests an order in respect of the correct calculation of future payments, and unspecified damages for non-payment and underpayment of past royalties to the date of the claim, together with additional damages until the date of trial, interest, costs and other damages.  The litigation is in the discovery phase, and trial is expected to commence in September 2018.

 

 

 

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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, 2017 filed with the Securities and Exchange Commission (the “SEC”) on August 10, 2017.

 

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 2017 10-K.

 

Statement Regarding Third Party Information

 

Certain information provided in this report, including the Operator’s Production Estimates by Stream and Royalty Interest for Calendar 2018 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 March 31, 2018, we owned stream interests on five producing properties and one development stage property.  Stream interests accounted for approximately 72% and 70%, respectively, of our total revenue for the three and nine months ended March 31, 2018 and 72% and 71%, respectively, of our total revenue for the three and nine months ended March 31, 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 March 31, 2018, we owned royalty interests on 34 producing properties, 21 development stage properties and 132 exploration stage properties, of which we consider 53 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 28% and 30%, respectively, of our total revenue for the three and nine months ended March 31, 2018 and 28% and 29%, respectively, of our total revenue for the three and nine months ended March 31, 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, LLC joint venture (“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 nine months ended March 31, 2018 and 2017, gold, silver and copper price averages and percentage of revenue by metal were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

March 31, 2018

 

March 31, 2017

 

March 31, 2018

 

March 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)

 

$

1,329

 

76%

 

$

1,219

 

86%

 

$

1,294

 

77%

 

$

1,260

 

86%

Silver ($/ounce)

 

$

16.77

 

6%

 

$

17.42

 

7%

 

$

16.78

 

8%

 

$

18.09

 

8%

Copper ($/pound)

 

$

3.16

 

15%

 

$

2.65

 

3%

 

$

3.04

 

11%

 

$

2.40

 

3%

Other

 

 

N/A

 

3%

 

 

N/A

 

4%

 

 

N/A

 

4%

 

 

N/A

 

3%

 

Recent Business Developments

 

U.S. Tax Legislation

 

On December 22, 2017, H.R. 1, originally known as the Tax Cuts and Jobs Act (the “Act”), was enacted and is effective for tax years including January 1, 2018.  The effects of the Act were recognized in the period of enactment, or the period ending December 31, 2017.  Certain other aspects of the Act are not effective for fiscal June 30 companies until July 1, 2018.

 

The Act, among other things, reduced the U.S. corporate income tax rate to 21% starting January 1, 2018.  As a United States domiciled company, we expect that the Act will have a positive long-term impact on Royal Gold’s future financial results through the reduction in the U.S. corporate tax rate from 35% to 21% and by allowing us to efficiently repatriate future earnings from our foreign subsidiaries.  As the Company is a fiscal year tax payer, we applied a blended U.S. federal income tax rate of approximately 28.1% for the fiscal year ending June 30, 2018.  The blended percentage was calculated on a pro-rata percentage of the number of days before and after January 1, 2018.  The Company’s U.S. statutory federal corporate income tax rate will be 21% for the fiscal year commencing on July 1, 2018 and all future years. 

 

As a result of the Act, the Company recorded a net charge (expense) of $26.4 million during the three months ended December 31, 2017 and nine months ended March 31, 2018.  This amount is included in Income tax benefit (expense) on our consolidated statements of operations and comprehensive (loss) income.  The revised tax expense consists of three components: (i) a $12.2 million charge relating to the one-time mandatory tax on the net accumulated post-1986 untaxed earnings and profits of the Company’s foreign subsidiaries, which we will elect to pay over an eight-year period, (ii) a $2.7 million benefit resulting from the re-measurement of the Company’s net deferred tax assets and liabilities, and (iii) a $16.9 million charge related to re-measurement of the U.S. income tax impacts resulting from foreign uncertain tax positions.  Refer to Note 7 of our notes to consolidated financial statements for further discussion on the income tax accounting considerations for the Act.

 

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

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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 2017 10-K for further discussion of our principal producing and development stream and royalty interests.

 

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)

Rainy River(1)

    

Ontario, Canada

    

New Gold, Inc. (“New Gold”)

    

Gold stream - 6.5% of gold produced (until 230,000 ounces delivered; 3.25% thereafter)

 

 

 

 

 

 

Silver stream - 60% of silver produced (until 3.1 million ounces delivered; 30% thereafter)

Wassa and Prestea(2)

 

Western Region of Ghana

 

Golden Star Resources Ltd. (“Golden Star”)

 

Gold stream - 10.5% of gold produced


(1)

New Gold announced commercial production at Rainy River in October 2017.  The Company reclassified the Rainy River stream interest to production stage from development stage during the three months ended December 31, 2017.

(2)

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 received annual production estimates from many of the operators of our producing mines during the first calendar quarter of 2018.  The following table shows such production estimates for our principal producing properties for calendar 2018 as well as the actual production reported to us by the various operators through March 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.

 

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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

    

 

    

 

    

14,000

    

 

    

 

Mount Milligan(4)

 

195,000 - 215,000

 

 

 

47 - 52 million

 

29,500

 

 

 

6.1 million

Pueblo Viejo(5)

 

585,000 - 615,000

 

Not provided

 

 

 

141,000

 

Not provided

 

 

Rainy River(6)

 

310,000 - 350,000

 

Not provided

 

 

 

39,300

 

0.1 million

 

 

Wassa and Prestea

 

230,000 - 255,000

 

 

 

 

 

57,600

 

 

 

 

Royalty:

 

 

 

 

 

 

 

 

 

 

 

 

Cortez GSR1

 

48,300

 

 

 

 

 

18,500

 

 

 

 

Cortez GSR2

 

2,200

 

 

 

 

 

400

 

 

 

 

Cortez GSR3

 

50,500

 

 

 

 

 

18,900

 

 

 

 

Cortez NVR1

 

31,600

 

 

 

 

 

11,900

 

 

 

 

Peñasquito(7)

 

310,000

 

Not provided

 

 

 

98,000

 

5.2 million

 

 

Lead

 

  

 

  

 

160 million

 

 

 

 

 

26.0 million

Zinc

 

  

 

  

 

300 million

 

 

 

 

 

88.7 million


(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 2017 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 March 31, 2018, unless otherwise noted.

 

(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 Rainy River are produced gold and silver in doré.  The operator did not provide estimated silver production.

 

(7)

The estimated and actual gold production figures shown for Peñasquito are payable gold in concentrate.  The operator did not provide estimated annual silver production. 

 

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 10,000 ounces of gold for the three months ended March 31, 2018, compared to approximately 10,900 ounces of gold for the three months ended March 31, 2017. 

 

Teck indicated that they expect grades to continue to gradually decline, which they expect to be offset largely by planned throughput improvements in the mill.  The current life of mine for Carmen de Andacollo is expected to continue until 2034.  Additional permitting or amendments to existing permits will be required to execute the life of mine plan.

 

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Mount Milligan

 

Gold stream deliveries from Mount Milligan were approximately 27,400 ounces of gold for the three months ended March 31, 2018, compared to approximately 22,700 ounces of gold for the three months ended March 31, 2017.  The increase is due to the timing of receipt of shipments.

 

Copper stream deliveries from Mount Milligan were approximately 1,540 tonnes during the three months ended March 31, 2018.  Copper stream deliveries began during the June 2017 quarter.

 

On December 27, 2017, Centerra reported that mill processing operations at Mount Milligan were temporarily suspended due to insufficient water.   Mill operations restarted on February 5, 2018 with a single ball mill, and the second ball mill restarted on March 23, 2018.  Centerra reported on May 1, 2018 that Mount Milligan was operating at an average throughput of approximately 40,000 tonnes per day, and that once the spring snow melt is underway, throughput is expected to increase to a targeted average of 55,000 tonnes per day for the second half of calendar 2018.  

 

Centerra is pursuing more permanent permitting solutions to allow higher levels of pumping from current water sources and is developing additional ground water sources for Mount Milligan to proactively mitigate for potential future water shortages during winter months.

 

Due to the timing of shipments and deliveries of gold and copper, the impact of the temporary shutdown is likely to be reflected in Royal Gold’s mid-calendar 2018 results, as some of the deliveries of gold and copper that were expected in the June through August 2018 period will be deferred to a later date.

 

Pueblo Viejo

 

Stream deliveries from Pueblo Viejo were approximately 13,200 ounces of gold and 616,300 ounces of silver for the three months ended March 31, 2018, compared to approximately 10,400 ounces of gold and 373,600 ounces of silver for the three months ended March 31, 2017.  Barrick’s production during the March 2018 quarter was in-line with the prior year quarter as lower than planned ore grades were offset by higher throughput due to improved autoclave efficiencies, the deferral of the autoclave shutdowns to the June 2018 quarter and higher recovery improvements in carbon management, cyanide addition and regeneration kiln control.

 

Barrick expects production during the June 2018 quarter to be impacted by scheduled autoclave maintenance shutdowns that commenced at the beginning of the June 2018 quarter.  Barrick anticipates ore grades mined and processed to increase in the subsequent quarters, as mining progresses into higher grade zones.  Barrick indicated that for calendar 2018 the Pueblo Viejo mine will be focused on improving operational efficiencies and continuing work on the scoping studies for a plant expansion and the addition of a pre-oxidation heap leach pad, followed by a prefeasibility study and onsite in-plant proof of concept testing, including a 100 tonne per hour flotation plant and a 200,000 tonne per annum bio-oxidation leach pad.  Barrick stated this project has the potential to convert roughly seven million ounces of mineralized material to proven and probable reserves (100 percent basis).

 

Rainy River 

 

Stream deliveries from Rainy River were approximately 2,900 ounces of gold and approximately 41,800 ounces of silver for the three months ended March 31, 2018. Gold and silver deliveries began during the December 2017 quarter.

 

Mining activity continued to progress on plan during the March 2018 quarter. Rainy River mined a total of 3.3 million tonnes of ore and currently has a high/medium grade stockpile of approximately 1.3 million tonnes that is available for processing in the near-term, and a low-grade stockpile of approximately 2.1 million tonnes that is scheduled to be processed at the end of the mine life.

 

The process facility throughput averaged approximately 17,500 tonnes per calendar day and 81% gold recovery during the March quarter. The process facility encountered operational and mechanical challenges during the quarter that impacted availability. No single issue accounted for a significant portion of the unplanned downtime.  However, plugged apron feeders, premature motor failure on the cyclone feed pump, and additional time required for the initial replacement of SAG mill liners are examples of the issues encountered.  These issues were addressed through the quarter which also provided insight into minor design improvements that should improve the process facility performance going forward. Review and

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implementation of the design improvements is underway, ultimately reducing reoccurrence and increasing operational stability.  Importantly, the process facility demonstrated its operational potential with throughput rates of approximately 22,500 tonnes on certain days. Recoveries in the quarter were lower than planned due to the previously described process interruptions as well as performance and increased wear of various screens, which have since been addressed.  During the first 23 days of April, New Gold reported an average gold recovery of 87% and that the focus in the second quarter of calendar 2018 is on increasing and stabilizing the process facility availability as well as recoveries.

 

New Gold has recognized an opportunity to increase the process facility’s throughput rate. During the current quarter, New Gold engaged an external engineering firm and are currently finalizing a study that could increase Rainy River’s throughput to a steady 24,000 tonne per day rate.

 

Wassa and Prestea

 

Gold stream deliveries from Wassa and Prestea were approximately 6,800 ounces of gold for the three months ended March 31, 2018, compared to approximately 5,700 ounces of gold for the three months ended March 31, 2017.  Under our stream agreement, the gold stream percentage at Wassa and Prestea increased to 10.5%, from 9.25%, effective January 1, 2018.

 

Golden Star reported a 13% increase in gold production at the Wassa complex during the March 2018 quarter compared the prior year quarter, as a result of the strong production from Wassa underground.

 

Wassa underground grade increased to 4.54 grams per tonne of gold and mining rate exceeded expectations of 2,300 tonnes per day during the March 2018 quarter, achieving approximately 2,400 tonnes per day.  Golden Star expects the ore production rate to continue to increase to an average rate between 2,700 to 3,000 tonnes per day in 2018. 

 

At Prestea underground, Golden Star experienced problems with blasting in the first stope which continued during the quarter.  As a result, the blasted ore from the first stope contained higher than anticipated levels of dilution.  Golden Star made changes to drill design patterns, blasting practice, raise layouts and stope ventilation, in order to address the dilution issues. 

 

Golden Star expects the performance of the second stope to be much stronger, as a result of the changes made.  Blasting of the second stope is expected to be completed in mid-April 2018, followed by initial draw down of the stope.  Golden Star reported the mucking of the swell ore from the second stope began and it is performing in line with the grades forecasted in the block model.

 

On March 29, 2018, Golden Star filed an updated technical report pursuant to National Instrument 43-101 for the Bogoso/Prestea operation.  The technical report highlights average annual gold production of approximately 90,000 ounces over the 5-year life of mine based on existing mineral reserves and a production rate of 650 tonnes per day.

 

Royalty Interests

 

Cortez

 

Production attributable to our royalty interest at Cortez increased approximately 67% over the prior year quarter.  Waste stripping at Crossroads, which is subject to our NVR1 (Crossroads) and GSR2 royalty interests is currently ongoing.    Production from Crossroads is expected to begin in late calendar 2018.

 

Pascua-Lama

 

On January 18, 2018 Barrick reported that it is analyzing a revised sanction related to the Pascua-Lama project issued by Chile’s Superintendencia del Medio Ambiente (“SMA”) on January 17, 2018.  The sanction is part of a re-evaluation process ordered by Chile’s Environmental Court in 2014 and relates to historical compliance matters at the Pascua-Lama project.    According to Barrick, the SMA has not revoked Pascua-Lama’s environmental permit, but has ordered the closure of existing facilities on the Chilean side of the project, in addition to certain monitoring activities.

 

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On February 6, 2018, in light of the SMA order to close surface facilities in Chile, Barrick announced it reclassified Pascua-Lama’s proven and probable gold reserves of approximately 14 million ounces, which were based on an open pit mine plan, as mineralized material.    

 

On April 23, 2018, Barrick announced that work on the prefeasibility study for a potential underground project has been suspended, and they will focus on adjusting the project closure plan for surface infrastructure on the Chilean side of the project.  Barrick will continue to evaluate opportunities to de-risk the project while maintaining Pascua-Lama as an option for development in the future if economics improve and related risks can be mitigated. 

 

The Company owns a 0.78% to 5.45% sliding-scale net smelter return (“NSR”) gold royalty and a 1.09% NSR copper royalty on the Pascua-Lama project.  Our royalty interests are applicable to all gold and copper production from the portion of the Pascua-Lama project lying on the Chilean side of the border.  The Company routinely assesses whether impairment indicators are present for its long-lived assets.  A significant reduction in reserves or mineralized material is an indicator of potential impairment.  Refer to Note 2 of our notes to consolidated financial statements for further discussion on the impairment assessment and results for our Pascua-Lama royalty interest during the three months ended March 31, 2018.  Pursuant to Barrick’s reclass of reserves to mineralized material at Pascua-Lama, the Company reclassified the remaining carrying value to exploration stage from development stage on our consolidated balance sheets as of March 31, 2018.

 

Peñasquito

 

Gold and lead production attributable to our royalty interest at Peñasquito decreased approximately 34% and 17%, respectively, when compared to the prior year quarter.  Silver and zinc production were in line with the prior year quarter. Goldcorp reported gold production was lower during the March 2018 quarter as a result of the planned transition from the higher grade area of Phase 5 at the bottom of the Peñasco pit to lower grade ore from the beginning of Phase 6, lower grade stockpiles, and 10 days of planned mill downtime for maintenance.  Goldcorp expects production to resume in the higher grade ore in late calendar 2019 when the Phase 6 stripping program exposes higher grade ore in the Peñasco pit.

 

For calendar 2018, Peñasquito is scheduled to mine 39.1 million tonnes of ore, with total material movement of 189 million tonnes.  The open pit operations will progress at a nominal annual mining rate of 225 million tonnes per year until the end of calendar 2023, after which mining volumes are expected to decline as the stripping ratios of ore to waste decrease.

 

On April 25, 2018, Goldcorp reported the Pyrite Leach Plant (“PLP”) is 86% complete and is expected to commence commissioning in the December 2018 quarter.  The carbon pre-flotation circuit commenced wet commissioning during April 2019.  The PLP is expected to increase overall gold and silver recovery by treating the zinc flotation tailings before discharge to the tailings storage facility. Goldcorp expects the PLP to add production of approximately one million ounces of gold and 44 million ounces of silver over the current life of the mine.  

 

Results of Operations

 

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

 

For the quarter ended March 31, 2018, we recorded a  net loss attributable to Royal Gold stockholders of $153.7 million, or ($2.35) per basic and diluted share, as compared to net income attributable to Royal Gold stockholders of $23.7 million, or $0.36 per basic and diluted share, for the quarter ended March 31, 2017.  The decrease in our earnings per share was attributable to impairment charges of approximately $239.4 million, primarily on our royalty interest at Pascua-Lama, as discussed further in Note 2 of our notes to consolidated financial statements.  This decrease was partially offset by an increase in our revenue, which is discussed below.  The effect of the impairment charges during the quarter ended March 31, 2018, was $2.74 per basic share, after taxes. 

 

For the quarter ended March 31, 2018, we recognized total revenue of $116.0 million, which is comprised of stream revenue of $83.0 million and royalty revenue of $33.0 million at an average gold price of $1,329 per ounce, an average silver price of $16.77 per ounce and an average copper price of $3.16 per pound.  This is compared to total revenue of $107.0 million for the three months ended March 31, 2017, which was comprised of stream revenue of $76.6 million and royalty revenue of $30.4 million, at an average gold price of $1,219 per ounce, an average silver price of $17.42 per ounce and an average copper price of $2.65 per pound for the quarter ended March 31, 2017.  Revenue and the corresponding production attributable to our stream and royalty interests for the quarter ended March 31, 2018 compared to the quarter ended March 31, 2017 are as follows:

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Revenue and Reported Production Subject to Our Stream and Royalty Interests

Quarter Ended March 31, 2018 and 2017

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

March 31, 2018

 

March 31, 2017

 

 

 

 

 

 

Reported

 

 

 

Reported

Stream/Royalty

    

Metal(s)

    

Revenue

    

Production(1)

    

Revenue

    

Production(1)

Stream(2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mount Milligan

 

 

 

$

47,807

 

 

 

 

$

35,112

 

 

 

 

 

Gold

 

 

 

 

25,800

oz.

 

 

 

 

28,900

oz.

 

 

Copper

 

 

 

 

4.3

Mlbs.

 

 

 

 

N/A

 

Pueblo Viejo

 

 

 

$

15,734

 

 

 

 

$

24,524

 

 

 

 

 

Gold

 

 

 

 

8,500

oz.

 

 

 

 

15,600

oz.

 

 

Silver

 

 

 

 

260,800

oz.

 

 

 

 

322,000

oz.

Wassa and Prestea

 

Gold

 

$

8,350

 

6,300

oz.

 

$

6,563

 

5,400

oz.

Andacollo

 

Gold

 

$

7,186

 

5,400

oz.

 

$

10,398

 

8,500

oz.

Rainy River

 

 

 

$

3,902

 

 

 

 

$

N/A

 

 

 

 

 

Gold

 

 

 

 

2,800

oz.

 

 

 

 

N/A

 

 

 

Silver

 

 

 

 

11,100

oz.

 

 

 

 

N/A

 

Total stream revenue

 

 

 

$

82,979

 

 

 

 

$

76,597

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Royalty(2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Peñasquito

 

 

 

$

6,452

 

 

 

 

$

6,981

 

 

 

 

 

Gold

 

 

 

 

91,200

oz.

 

 

 

 

137,500

oz.

 

 

Silver

 

 

 

 

5.0

Moz.

 

 

 

 

4.8

Moz.

 

 

Lead

 

 

 

 

26.0

Mlbs.

 

 

 

 

31.3

Mlbs.

 

 

Zinc

 

 

 

 

88.0

Mlbs.

 

 

 

 

88.5

Mlbs.

Cortez

 

Gold

 

$

1,901

 

18,900

oz.

 

$

1,068

 

11,300

oz.

Other(3)

 

Various

 

$

24,651

 

N/A

 

 

$

22,326

 

N/A

 

Total royalty revenue

 

 

 

$

33,004

 

 

 

 

$

30,375

 

 

 

Total Revenue

 

 

 

$

115,983

 

 

 

 

$

106,972

 

 

 


(1)

Reported production relates to the amount of metal sales, subject to our stream and royalty interests for the three months ended March 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 increase in our total revenue for the three months ended March 31, 2018, compared with the three months ended March 31, 2017, resulted primarily from an increase in our stream revenue and an increase in the average gold and copper prices.  The increase in our stream revenue was primarily attributable to new gold and silver production from our Rainy River stream, an increase in gold sales at Wassa and Prestea and increased copper sales at Mount Milligan, partially offset by lower metal sales at Pueblo Viejo and Andacollo.   Silver deliveries from Rainy River began during our December 2017 quarter with silver sales beginning in the March 2018 quarter.  Copper deliveries from Mount Milligan began during our June 2017 quarter.    

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

As of

 

As of

 

 

March 31, 2018

 

March 31, 2017

 

March 31, 2018

 

June 30, 2017

Gold Stream

    

Purchases (oz.)

    

Sales (oz.)

    

Purchases (oz.)

    

Sales (oz.)

    

Inventory (oz.)

    

Inventory (oz.)

Mount Milligan

 

27,400

 

25,800

 

22,700

 

28,900

 

6,800

 

100

Pueblo Viejo

 

13,200

 

8,500

 

10,400

 

15,600

 

13,200

 

12,900

Andacollo

 

10,000

 

5,400

 

10,900

 

8,500

 

4,600

 

100

Wassa and Prestea

 

6,800

 

6,300

 

5,700

 

5,400

 

900

 

1,000

Rainy River

 

2,900

 

2,800

 

 —

 

 —

 

300

 

 —

Total

 

60,300

 

48,800

 

49,700

 

58,400

 

25,800

 

14,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

As of

 

As of

 

 

March 31, 2018

 

March 31, 2017

 

March 31, 2018

 

June 30, 2017

Silver Stream

    

Purchases (oz.)

    

Sales (oz.)

    

Purchases (oz.)

    

Sales (oz.)

    

Inventory (oz.)

    

Inventory (oz.)

Pueblo Viejo

 

616,300

 

260,800

 

373,600

 

322,000

 

616,300

 

536,800

Rainy River

 

41,800

 

11,100

 

 —

 

 —

 

42,600

 

 —

Total

 

658,100

 

271,900

 

373,600

 

322,000

 

658,900

 

536,800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

As of

 

As of

 

 

March 31, 2018

 

March 31, 2017

 

March 31, 2018

 

June 30, 2017

Copper Stream

    

Purchases (tonnes)

    

Sales (tonnes)

    

Purchases (tonnes)

    

Sales (tonnes)

    

Inventory (tonnes)

    

Inventory (tonnes)

Mount Milligan

 

1,540

 

1,966

 

N/A

 

N/A

 

 —

 

 —

 

Our royalty revenue increased during the quarter ended March 31, 2018, compared with the quarter ended March 31, 2017,  primarily due to an increase in the average gold 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.

 

General and administrative expenses increased to $8.1 million for the three months ended March 31, 2018 from $5.4 million for the three months ended March 31, 2017.  The increase during the current quarter was primarily due to an increase in legal and litigation costs ($1.3 million) and an increase in non-cash stock based compensation ($1.2 million). 

 

Exploration costs decreased to $0.5 million for the three months ended March 31, 2018, from $2.6 million for the three months ended March 31, 2017.  Exploration costs are specific to our Peak Gold JV for exploration and advancement of the Tetlin gold project located near Tok, Alaska, as discussed further in Note 3 of our notes to consolidated financial statements included in our Fiscal 2017 10-K.  As of March 31, 2018, Royal Gold, through its wholly-owned subsidiary Royal Alaska, LLC owns a 39.6% membership interest in the Peak Gold JV. 

 

Impairment of royalty and stream interests was $239.4 million for the three months ended March 31, 2018.  The impairment of royalty interests was the result of our regular impairment analysis conducted during the three months ended March 31, 2018, and was primarily due to the presence of impairment indicators on our royalty interest at Pascua-Lama.  Refer to Note 2 of our notes to consolidated financial statements for further discussion on our impairment analysis and results. 

 

During the three months ended March 31, 2018, we recognized an income tax benefit totaling $45.9 million compared with an income tax expense of $6.5 million during the three months ended March 31, 2017.  This resulted in an effective tax rate of 22.9% in the current period, compared with 23.2% in the quarter ended March 31, 2017.  The effective tax rate for the three months ended March 31, 2018 was affected by the tax benefit related to the royalty impairment offset by an increase to uncertain tax liabilities as the result of a reassessment in a Canadian subsidiary.

 

Nine Months Ended March 31, 2018, Compared to Nine Months Ended March 31, 2017 

 

For the nine months ended March 31, 2018, we recorded a net loss attributable to Royal Gold stockholders of $139.8 million, or ($2.14) per basic and diluted share, as compared to net income attributable to Royal Gold stockholders of $81.5 million, or $1.25 per basic share and diluted share, for the nine months ended March 31, 2017.  The decrease in our earnings per share was primarily attributable to impairment charges of approximately $239.4 million on our royalty interest at Pascua-Lama, as discussed further in Note 2 of our notes to consolidated financial statements.  This decrease was partially offset by an increase in our revenue, which is discussed below.  The effect of the impairment charges during the

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quarter ended March 31, 2018, was $2.74 per basic share, after taxes.  The decrease in our earnings per share was also attributable to an increase in our income tax expense due to the impacts of the Act and a non-cash functional currency election at certain of our Canadian subsidiaries.  The effects of the Act and the non-cash functional currency election for income tax purposes was additional income tax expense of approximately $26.4 million and $15.9 million, respectively, or $0.40 and $0.24 per basic share, respectively, during the three months ended December 31, 2017.  Refer to “Recent Business Developments” above and Note 7 of our notes to consolidated financial statements for further discussion on the Act. 

For the nine months ended March 31, 2018, we recognized total revenue of $342.8 million, which is comprised of stream revenue of $241.0 million and royalty revenue of $101.8 million, at an average gold price of $1,294 per ounce, an average silver price of $16.78 per ounce and an average copper price of $3.04 per pound.  This is compared to total revenue of $331.9 million for the nine months ended March 31, 2017, which is comprised of stream revenue of $236.1 million and royalty revenue of $95.8 million, at an average gold price of $1,260 per ounce, an average silver price of $18.09 per ounce and an average copper price of $2.40 per pound.  Revenue and the corresponding production attributable to our stream and royalty interests for the nine months ended March 31, 2018 compared to the nine months ended March 31, 2017 is as follows:

Revenue and Reported Production Subject to Our Royalty and Stream Interests

Nine Months Ended March 31, 2018 and 2017

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

 

March 31, 2018

 

March 31, 2017

 

 

 

 

 

 

 

Reported

 

 

 

 

Reported

Stream/Royalty

    

Metal(s)

    

Revenue

    

Production(1)

    

Revenue

    

Production(1)

Stream(2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mount Milligan

 

 

 

$

101,390

 

 

 

 

$

105,161

 

 

 

 

 

Gold

 

 

 

 

57,100

oz.

 

 

 

 

83,500

oz.

 

 

Copper

 

 

 

 

8.7

Mlbs.

 

 

 

 

N/A

 

Pueblo Viejo

 

 

 

$

67,492

 

 

 

 

$

71,911

 

 

 

 

 

Gold

 

 

 

 

35,900

oz.

 

 

 

 

40,200

oz.

 

 

Silver

 

 

 

 

1.3

Moz.

 

 

 

 

1.2

Moz.

Andacollo

 

Gold

 

$

41,124

 

32,100

oz.

 

$

41,552

 

32,900

oz.

Wassa and Prestea

 

Gold

 

$

26,049

 

20,200

oz.

 

$

17,484

 

14,000

oz.

Rainy River

 

 

 

$

4,973

 

 

 

 

 

N/A

 

 

 

 

 

Gold

 

 

 

 

3,600

oz.

 

 

 

 

N/A

 

 

 

Silver

 

 

 

 

11,100

oz.

 

 

 

 

N/A

 

Total stream revenue

 

 

 

$

241,028

 

 

 

 

$

236,108

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Royalty(2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Peñasquito

 

 

 

$

20,439

 

 

 

 

$

19,935

 

 

 

 

 

Gold

 

 

 

 

296,200

oz.

 

 

 

 

423,000

oz.

 

 

Silver

 

 

 

 

15.9

Moz.

 

 

 

 

15.1

Moz.

 

 

Lead

 

 

 

 

95.5

Mlbs.

 

 

 

 

97.8

Mlbs.

 

 

Zinc

 

 

 

 

274.8

Mlbs.

 

 

 

 

232.1

Mlbs.

Cortez

 

Gold

 

$

7,823

 

73,800

oz.

 

$

4,942

 

47,600

oz.

Other(3)

 

Various

 

$

73,517

 

N/A

 

 

$

70,895

 

N/A

 

Total royalty revenue

 

 

 

$

101,779

 

 

 

 

$

95,772

 

 

 

Total revenue

 

$

342,807

 

 

 

 

$

331,880

 

 

 


(1)Reported production relates to the amount of metal sales, subject to our royalty and stream interests for the nine months ended March 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 interests. 

(3) Individually, no stream or royalty included within the “Other” category contributed greater than 5% of our total revenue for either period.

The increase in our total revenue for the nine months ended March 31, 2018, compared with the nine months ended March 31, 2017, resulted primarily from an increase in our stream revenue and an increase in the average gold and copper prices.  The increase in our stream revenue was primarily attributable to new gold and silver production from our Rainy River stream, an increase in gold sales at Wassa and Prestea and increased copper sales at Mount Milligan, partially offset

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by lower gold sales at Pueblo Viejo and Andacollo.  Silver deliveries from Rainy River began during our December 2017 quarter with silver sales beginning in the March 2018 quarter.  Copper deliveries from Mount Milligan began during our June 2017 quarter.    

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

Nine Months Ended

 

As of

 

As of

 

 

March 31, 2018

 

March 31, 2017

 

March 31, 2018

 

June 30, 2017

Gold Stream

    

Purchases (oz.)

    

Sales (oz.)

    

Purchases (oz.)

    

Sales (oz.)

    

Inventory (oz.)

    

Inventory (oz.)

Mount Milligan

 

63,800

 

57,100

 

76,100

 

83,500

 

6,800

 

100

Andacollo

 

36,500

 

32,100

 

35,400

 

32,900

 

4,600

 

100

Pueblo Viejo

 

36,300

 

35,900

 

39,700

 

40,200

 

13,200

 

12,900

Wassa and Prestea

 

20,200

 

20,200

 

14,500

 

14,000

 

900

 

1,000

Rainy River

 

3,900

 

3,600

 

 —

 

 —

 

300

 

 —

Total

 

160,700

 

148,900

 

165,700

 

170,600

 

25,800

 

14,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

Nine Months Ended

 

As of

 

As of

 

 

March 31, 2018

 

March 31, 2017

 

March 31, 2018

 

June 30, 2017

Silver Stream

    

Purchases (oz.)

    

Sales (oz.)

    

Purchases (oz.)

    

Sales (oz.)

    

Inventory (oz.)

    

Inventory (oz.)

Pueblo Viejo

 

1,346,500

 

1,267,000

 

1,239,400

 

1,188,600

 

616,300

 

536,800

Rainy River

 

53,700

 

11,100

 

 —

 

 —

 

42,600

 

 —

Total

 

1,400,200

 

1,278,100

 

1,239,400

 

1,188,600

 

658,900

 

536,800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

Nine Months Ended

 

As of

 

As of

 

 

March 31, 2018

 

March 31, 2017

 

March 31, 2018

 

June 30, 2017

Copper Stream

    

Purchases (tonnes)

    

Sales (tonnes)

    

Purchases (tonnes)

    

Sales (tonnes)

    

Inventory (tonnes)

    

Inventory (tonnes)

Mount Milligan

 

3,954

 

3,954

 

N/A

 

N/A

 

 —

 

 —

 

Our royalty revenue increased during the nine months ended March 31, 2018, compared with the nine months ended March 31, 2017,  primarily due to an increase in the average gold and copper prices and increased gold production at Cortez.  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 $61.6 million for the nine months ended March 31, 2018, compared to $67.6 million for the nine months ended March 31, 2017.  The decrease was primarily due to decreased gold sales from Mount Milligan and Pueblo Viejo.  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.

 

Impairment of royalty and stream interests was $239.4 million for the nine months ended March 31, 2018.  The impairment of royalty interests was the result of our regular impairment analysis conducted during the three months ended March 31, 2018, and was primarily due to the presence of impairment indicators on our royalty interest at Pascua-Lama.  Refer to Note 2 of our notes to consolidated financial statements for further discussion on our impairment analysis and results. 

 

Interest and other income decreased to $3.4 million for the nine months ended March 31, 2018, from $10.1 million for the nine months ended March 31, 2017.  The decrease was primarily due to a gain recognized ($3.4 million) on consideration received as part of the termination of our Phoenix Gold Project streaming interest during the prior period.  Refer to our Fiscal 2017 10-K for discussion on the Phoenix Gold Project restructuring.  The decrease in interest and other income was also due to consideration received as part of a legal settlement and termination of a non-principal royalty of approximately $2.8 million during the prior period.

 

During the nine months ended March 31, 2018, we recognized income tax expense totaling $10.0 million compared with $18.7 million during the nine months ended March 31, 2017.  This resulted in an effective tax rate of (7.5%) in the current period, compared with 19.9% during the nine months ended March 31, 2017.  The increase in the effective tax rate for the nine months ended March 31, 2018 is primarily attributable to the effects of the Act and a non-cash functional currency election at certain of our Canadian subsidiaries.  Refer to “Recent Business Developments” above and Note 7 of our notes to consolidated financial statements for further discussion on the Act.

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Liquidity and Capital Resources

 

Overview

 

At March 31, 2018, we had current assets of $151.9 million compared to current liabilities of $43.5 million resulting in working capital of $108.4 million and a current ratio of 3 to 1.  This compares to current assets of $143.6 million and current liabilities of $34.3 million at June 30, 2017, resulting in working capital of $109.3 million and a current ratio of approximately 4 to 1. 

 

During the quarter ended March 31, 2018, liquidity needs were met from $94.7 million in net revenue and our available cash resources.  During the three months ended March 31, 2018, the Company repaid $75.0 million of the outstanding borrowings under the revolving credit facility.  As of March 31, 2018, the Company had $925 million available and $75 million outstanding under its revolving credit facility.  Working capital, combined with the Company’s undrawn revolving credit facility, resulted in approximately $1 billion  of total available liquidity as of March 31, 2018.  The Company was in compliance with each financial covenant under the revolving credit facility as of March 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 2017 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 $251.8 million for the nine months ended March 31, 2018, compared to $200.9 million for the nine months ended March 31, 2017.  The increase was primarily due to tax refund received from a foreign taxing authority of approximately $21 million and an increase in proceeds received from our stream and royalty interests, net of production taxes and cost of sales, of approximately $13.1 million.    

 

Investing Activities

 

Net cash used in investing activities totaled $2.3 million for the nine months ended March 31, 2018, compared to cash used in investing activities of $202.2 million for the nine months ended March 31, 2017.  The decrease in cash used in investing activities is primarily due to a decrease in acquisitions of stream and royalty interests in mineral properties compared to the prior year period. 

 

Financing Activities

 

Net cash used in financing activities totaled $226.0 million for the nine months ended March 31, 2018, compared to cash used in financing activities of $27.3 million for the nine months ended March 31, 2017.  The increase in cash used in financing activities is primarily due to increased repayments of amounts outstanding under our revolving credit facility. 

 

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 2017 10-K for discussion on our critical accounting policies.

 

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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; effective tax rate estimates, including the effect of recently enacted tax reform; the adequacy of financial resources and funds to cover anticipated expenditures for debt service and general and administrative expenses 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;

 

·

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;

 

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·

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 2017 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 royalty stream interests have features that may amplify the negative effects of a drop in metals prices,” under Part I, Item 1A of our Fiscal 2017 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 nine months ended March 31, 2018, we reported revenue of $342.8 million, with an average gold price for the period of $1,294 per ounce, an average silver price of $16.78 per ounce and an average copper price of $3.04 per pound.  Approximately 77% of our total reported revenues for the nine months ended March 31, 2018 were attributable to gold sales from our gold producing stream and royalty interests, as shown within the MD&A.  For the nine months ended March 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 $27.8 million.

 

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Approximately 11% of our total reported revenues for the nine months ended March 31, 2018 were attributable to copper sales from our copper producing stream and royalty interests.  For the nine months ended March 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 $3.9 million.

 

Approximately 6% of our total reported revenues for the nine months ended March 31, 2018 were attributable to silver sales from our silver producing stream and royalty interests.  For the nine months ended March 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 $2.8 million.

 

 

ITEM 4.     CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

As of March 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 Treasurer (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 Treasurer have concluded that, as of March 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 Treasurer, 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 March 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 10 of our notes to consolidated financial statements for a discussion of the litigation 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 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 2017 10-K.

 

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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

 

 

 

3.1*

 

Restated Certificate of Incorporation.

 

 

 

4.1*

 

Form of common stock certificate

 

 

 

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:  May 3, 2018

 

 

 

By:

/s/ Tony Jensen

 

 

Tony Jensen

 

 

President and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

Date:  May 3, 2018

By:

/s/ Stefan Wenger

 

 

Stefan Wenger

 

 

Chief Financial Officer and Treasurer

 

 

(Principal Financial and Accounting Officer)

 

 

 

33