Royal Gold - 10-Q quarterly report FY2014 Q2

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the Quarterly Period Ended December 31, 2013

or

For the transition period from        to        

Commission File Number: 001-13357

Royal Gold, Inc.

(Exact Name of Registrant as Specified in Its Charter)

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 x  No o

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 x  No o

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

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

There were 64,449,535 shares of the Company’s common stock, par value $0.01 per share, outstanding as of January 22, 2014.  In addition, as of such date, there were 666,859 exchangeable shares of RG Exchangeco Inc. outstanding which are exchangeable at any time into shares of the Company’s common stock on a one-for-one basis and entitle their holders to voting, dividend and other rights economically equivalent to those of the Company’s common stock.

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements

(Unaudited)

1.                                      OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 royalties, metal streams, and similar 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.  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.  We may use the term “royalty interest” in these notes to the consolidated financial statements to refer to royalties, gold, silver or other metal stream interests, and other similar interests.

Summary of Significant Accounting Policies

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934, as amended.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for annual financial statements.  In the opinion of management, all adjustments which are of a normal recurring nature considered necessary for a fair presentation of our interim financial statements have been included in this Form 10-Q.  Operating results for the three and six months ended December 31, 2013, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2014.  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, 2013 filed with the Securities and Exchange Commission on August 8, 2013 (“Fiscal 2013 10-K”).

As a result of the start of production at Mt. Milligan during the quarter ended December 31, 2013, the following new accounting policies are considered significant to the Company:

Gold Sales

Gold received under our metal streams agreements is sold primarily in the spot market.  The sales price is fixed at the delivery date based on the gold spot price.  Revenue from gold sales is recognized on the date of the sale, which is also the date that title to the gold passes to the purchaser.

Cost of Sales

Cost of sales is specific to our stream agreement for Mt. Milligan and is the result of the Company’s purchases of gold for a cash payment of the lesser of $435 per ounce, or the prevailing market price of gold when purchased.

2.             ACQUISITION

El Morro Royalty Acquisition

In August 2013, Royal Gold, through a wholly-owned Chilean subsidiary, acquired a 70% interest in a 2.0% net smelter return (“NSR”) royalty on certain portions of the El Morro copper gold project in Chile (“El Morro”), from Xstrata Copper Chile S.A., for $35 million.  Goldcorp Inc. holds 70% ownership of the El Morro project and is the operator, with the remaining 30% held by New Gold Inc.

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements

(Unaudited)

As a result of (i) statutes of limitations that will begin to expire in the next 12 months in various jurisdictions, (ii) possible settlements of audit-related issues with taxing authorities in various jurisdictions with respect to which none of the issues are individually significant, and (iii) an additional accrual of exposure and interest on existing items, the Company believes that it is reasonably possible that the total amount of its net unrecognized income tax benefits will decrease between $5.0 million and $5.5 million in the next 12 months.

10.          SEGMENT INFORMATION

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

11.          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.

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements

(Unaudited)

(1)    Included in Cash and equivalents in the Company’s consolidated balance sheets.

(2)    Included in Available for sale securities in the Company’s consolidated balance sheets.

(3)    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 in the Company’s consolidated balance sheets.

The Company invests primarily in United States treasury bills with maturities of 90 days or less, which are classified within Level 1 of the fair value hierarchy.  The Company also invests in money market funds, which are traded by dealers or brokers in active over-the-counter markets.  The Company’s money market funds, which are invested in United States treasury bills or United States treasury backed securities, are also classified within Level 1 of the fair value hierarchy.  The Company’s marketable equity securities classified within Level 1 of the fair value hierarchy are valued using quoted market prices in active markets.  The fair value of the Level 1 marketable equity securities is calculated as the quoted market price of the marketable equity security multiplied by the quantity of shares held by the Company. The Company’s debt classified within Level 1 of the fair value hierarchy is valued using quoted prices in an active market.

As of December 31, 2013, 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 royalty and stream interests, intangible assets and other long-lived assets.  For these assets, measurement at fair value in periods subsequent to their initial recognition are applicable if any of these assets are determined to be impaired; however, no triggering events have occurred relative to any of these assets during the six months ended December 31, 2013.  If recognition of these assets at their fair value becomes necessary, such measurements will be determined utilizing Level 3 inputs.

12.          COMMITMENTS AND CONTINGENCIES

Mt. Milligan Gold Stream Acquisition

The Company’s final commitment payment of $12.9 million to Thompson Creek as part of the Mt. Milligan gold stream acquisition was made in September 2013.  The Company has no remaining commitment payments to Thompson Creek as part of the Mt. Milligan gold stream.

Tulsequah Chief Gold and Silver Stream Acquisition

As of December 31, 2013, the Company has a remaining commitment of $50 million as part of its Tulsequah Chief gold and silver stream acquisition in December 2011.

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements

(Unaudited)

Voisey’s Bay

The Company owns a royalty on the Voisey’s Bay mine in Newfoundland and Labrador owned by Vale Newfoundland & Labrador Limited (“VNL”).  The royalty is owned by the Labrador Nickel Royalty Limited Partnership (“LNRLP”), in which the Company’s wholly-owned indirect subsidiary, Canadian Minerals Partnership, is the general partner and 89.99% owner.  The remaining interests in LNRLP are owned by Altius Investments Ltd. (10%), a company unrelated to Royal Gold, and the Company’s wholly-owned indirect subsidiary, Voisey’s Bay Holding Corporation (0.01%).

On October 16, 2009, LNRLP filed a claim in the Supreme Court of Newfoundland and Labrador Trial Division against Vale Inco Limited, now known as Vale Canada Limited (“Vale Canada”) and its wholly-owned subsidiaries, Vale Inco Atlantic Sales Limited and VNL, related to the calculation of the NSR on the sale of concentrates, including nickel concentrates, from the Voisey’s Bay mine to Vale Canada.  The claim asserts that Vale Canada is incorrectly calculating the NSR and requests an order in respect of the correct calculation of future payments.  The claim also requests specific damages for underpayment of past royalties to the date of the claim in an amount not less than $29 million, together with additional damages until the date of trial, interest, costs and other damages.  The litigation is in the discovery phase.

13.          RELATED PARTY

Crescent Valley Partners, L.P. (“CVP”) was formed as a limited partnership in April 1992.  It owns a 1.25% net value royalty (“NVR1 Royalty”) on production of minerals from a portion of Cortez.  Denver Mining Finance Company (“DMFC”), our wholly-owned subsidiary, is the general partner and held an aggregate 31.633% limited partner interest as of December 31, 2013.  Our Chairman of the Board of Directors, one other member of our Board of Directors and a former member of our Board of Directors held an aggregate 35.563% limited partner interest as of December 31, 2013.  On January 2, 2014, DMFC acquired an additional 49.465% of the outstanding limited partnership interests in the CVP, as discussed further in Note 14 below under “Acquisition of CVP Limited Partnership Interests.”  The general partner performs administrative services for CVP in receiving and processing the royalty payments from the operator, including the disbursement of royalty payments and record keeping for in-kind distributions to the limited partners.

CVP receives its royalty from the Cortez Joint Venture in-kind.  The Company, as well as certain other limited partners, sell their pro-rata shares of such gold immediately and receive distributions in cash, while CVP holds gold for certain other limited partners.  Such gold inventories, which totaled 9,855 and 9,742 ounces of gold as of December 31, 2013 and  June 30, 2013, respectively, are held by a third party refinery in Utah for the account of the limited partners of CVP.  The inventories are carried at historical cost and are classified within Other assets on the Company’s consolidated balance sheets.  The carrying value of the gold in inventory was approximately $6.3 million and $6.1 million as of December 31, 2013 and June 30, 2013, respectively, while the fair value of such ounces was approximately $11.9 million and $11.6 million as of December 31, 2013 and June 30, 2013, respectively.  None of the gold currently held in inventory as of December 31, 2013 and June 30, 2013, is attributed to Royal Gold, as the gold allocated to Royal Gold’s CVP partnership interest is typically sold within five days of receipt.

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements

(Unaudited)

14.          SUBSEQUENT EVENT

Acquisition of CVP Limited Partnership Interests

On January 2, 2014, Royal Gold, through its wholly-owned subsidiary, DMFC, increased its ownership interest in the NVR1 Royalty by acquiring all or a portion of the limited partnership interests of nine limited partners in CVP, aggregating 49.465% of the outstanding limited partnership interests, for approximately $11.5 million.  The limited partners from whom DMFC acquired limited partnership interests included our Chairman of the Board of Directors, who sold 3.0% out of his total 3.063% interest; one other member of our Board of Directors, who sold his entire 8.0% interest; and a former member of our Board of Directors, who sold his entire 24.5% interest.  As a result of the transaction, DMFC now holds 81.098% of the outstanding limited partnership interests in the CVP, equating to a 1.014% net value royalty on production from all of the lands covered by the NVR1 Royalty excluding production from the mining claims comprising the Crossroad deposit (the “Crossroad Claims”) at Cortez, and a 0.618% net value royalty on production from the Crossroad Claims.  The Crossroad Claims are part of the Pipeline Complex.  The remaining related party, our Chairman of the Board of Directors, now holds a 0.063% limited partner interest in CVP.

Goldrush Royalty Acquisition

On January 7, 2014, Royal Gold acquired a 1.0% net revenue royalty on the southern end of Barrick Gold Corporation’s Goldrush deposit in Nevada from a private landowner for total consideration of $8.0 million, of which $1.0 million was paid at closing and the remaining $7.0 million will be paid in seven annual installments.  Goldrush is located approximately four miles from the Cortez mine and is currently in the exploration stage.

Amendment to Revolving Credit Facility

On January 29, 2014, Royal Gold amended and restated its revolving credit facility.  Key modifications to the revolving credit facility include, among other items: (1) an increase in the maximum availability from $350 million to $450 million; (2) an extension of the final maturity from May 2017 to January 2019; (3) an increase of the accordion feature from $50 million to $150 million which allows the Company to

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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, 2013 filed with the Securities and Exchange Commission (the “SEC”) on August 8, 2013 (the “Fiscal 2013 10-K”).

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,” “metal stream” and other types of royalty or similar interests throughout this MD&A.  These terms are defined in our Fiscal 2013 10-K.

Overview

Royal Gold, Inc., together with its subsidiaries, is engaged in the business of acquiring and managing precious metals royalties, metal streams, and similar 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.  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.  We may use the term “royalty interest” in this Quarterly Report on Form 10-Q to refer to royalties, gold, silver or other metal stream interests, and other similar interests.  We seek to acquire existing royalty interests or to finance projects that are in production or in development stage in exchange for royalty interests.  In the ordinary course of business, we engage in a continual review of opportunities to acquire existing royalty interests, to create new royalty interests through the financing of mine development or exploration, or to acquire companies that hold 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, analysis of technical, financial and other confidential information, submission of indications of interest, participation in preliminary discussions and negotiations and involvement as a bidder in competitive processes.

As of December 31, 2013, the Company owned royalty interests on 38 producing properties, 20 development stage properties and 145 exploration stage properties, of which the Company considers 49 to be evaluation stage projects.  The Company uses “evaluation stage” to describe exploration stage properties that contain mineralized material and on which operators are engaged in the search for reserves.  We do not conduct mining operations nor are we required to contribute to capital costs, exploration costs, environmental costs or other mining, processing and operating costs on the properties in which we hold royalty interests.  During the three months ended December 31, 2013, we focused on the management of our existing royalty interests and the acquisition of royalty interests.

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

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Principal Producing Properties

(1)       There have been approximately 197,000 cumulative payable ounces produced as of December 31, 2013.

(2)       Thompson Creek announced mill commissioning in August 2013 and began production during the fourth quarter of calendar 2013.

(3)       The Mulatos royalty is capped at 2.0 million gold ounces of production.  Approximately 1.2 million cumulative ounces of gold have been produced as of December 31, 2013.

Principal Development Properties

Operators’ Production Estimates by Royalty and Stream Interest for Calendar 2013

We received annual production estimates from many of the operators of our producing mines during the first calendar quarter of 2013.  The following table shows such production estimates for our principal producing properties for calendar 2013 as well as the actual production reported to us by the various operators through December 31, 2013.  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 the accuracy of such information.  Please refer to “Property Developments” below within this MD&A for further discussion on any updates at our principal producing or development properties.

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Operators’ Production Estimate by Royalty and Stream Interest for Calendar 2013 and Reported Production

Principal Producing Properties

For the period January 1, 2013 through December 31, 2013

(1)       There can be no assurance that production estimates received from our operators will be achieved.  Please 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 2013 10-K for information regarding factors that could affect actual results.

(2)      Reported production relates to the amount of metal sales, subject to our royalty and stream interests, for the period January 1, 2013 through December 31, 2013, as reported to us by the operators of the mines.

(3)       The Company did not receive calendar 2013 production guidance from the operator.

Property Developments

The following information is provided by the operators of the property, either to Royal Gold or in various documents made publicly available.  Reported production, as used below, relates to the amount of metal sales subject to our royalty and stream interests, as reported to us by the operators of the mines.

Andacollo

Andacollo reported production was 31% lower than the prior year quarter due to lower expected grades as mining progressed into Phase 3 of the pit.

Cortez

Reported production at Cortez decreased 54% over the prior year quarter as Barrick continued to prioritize open-pit and underground production at Cortez Hills, which is not subject to our royalty interest.  Stockpiled roaster ore that is normally sent to Goldstrike for processing was also displaced by Cortez Hill ore during the current quarter.

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Holt

Reported production at Holt decreased 15% over the prior year quarter due to scheduled hoist motor and hoist drive upgrades performed during the quarter. This improvement is expected to provide additional future hoisting capacity and increased reliability.

Las Cruces

Las Cruces reported production decreased 3% over the prior year quarter as First Quantum experienced lower sales volumes.  First Quantum continues to test the plant with higher ore throughput rates and lower grades as it prepares to enter lower copper grade areas of the mine, which is expected in late calendar 2014.

Mt. Milligan

RGLD Gold received a delivery of 2,149 ounces of physical gold based on a first shipment of approximately 5,500 payable ounces of gold from Mt. Milligan during our second quarter.  RGLD Gold’s 2,149 ounces received is based on the payable ounces multiplied by a provisional percentage of 75% and our 52.25% stream interest.  Per the Mt. Milligan stream agreement, the first 12 shipments are subject to a stated provisional percentage. Thompson Creek announced on January 29, 2014, that it has loaded its second ocean shipment of copper and gold concentrate from Mt. Milligan.

Thompson Creek expects the mine will reach commercial production within the first calendar quarter of 2014, defined as operating the mill at 60% of design capacity for 30 days.

Mulatos

Reported production at Mulatos decreased 34% over the prior year quarter as Alamos experienced lower than expected grades from the Escondida high-grade deposit.  Alamos expects to have depleted the Escondida high-grade zone by the end of the first quarter of 2014, at which point the Escondida Deep zone is expected to provide additional feed to continue mill production to the end of the second quarter of calendar 2014.  Alamos intends to transition to processing high grade ore from the San Carlos zone once the Escondida Deep zone has been depleted.

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Peñasquito

Reported gold and silver production at Peñasquito increased 60% and 34%, respectively, over the prior year quarter, while production of lead and zinc was 99% higher and 4% lower, respectively.  Goldcorp reported mining in the higher grade portion of the pit will continue throughout calendar 2014 and, combined with an assumed throughput of 110,000 tonnes per day, gold production is expected to increase significantly to between 530,000 and 560,000 ounces.  Including other metals on a gold equivalent basis, production is expected to total approximately 1.2 million to 1.25 million ounces. Production expectations over the balance of the five-year period assume throughput of 110,000 to 115,000 tonnes per day. During the fourth quarter of calendar 2013, construction commenced on the Northern Well Field, which will increase overall water availability upon expected completion by the end of calendar 2014.

Robinson

Reported gold and copper production at Robinson was down 25% and 46%, respectively, over the prior year quarter as the planned mine sequence moved to the Liberty pit, which has lower copper grades.

Results of Operations

Quarter Ended December 31, 2013, Compared to Quarter Ended December 31, 2012

For the quarter ended December 31, 2013, we recorded net income attributable to Royal Gold stockholders of $10.7 million, or $0.16 per basic and diluted share, as compared to net income attributable to Royal Gold stockholders of $27.2 million, or $0.42 per basic and diluted share, for the quarter ended December 31, 2012.  The decrease in our earnings per share was primarily attributable to a decrease in revenue, as discussed further below.

For the quarter ended December 31, 2013, we recognized total revenue of $52.8 million, at an average gold price of $1,276 per ounce, an average silver price of $20.82 per ounce, an average nickel price of $6.31 per pound and an average copper price of $3.24 per pound, compared to total revenue of $79.9 million, at an average gold price of $1,722 per ounce, an average silver price of $32.68 per ounce, an average nickel price of $7.70 per pound and an average copper price of $3.59 per pound for the quarter ended December 31, 2012.  Revenue and the corresponding production attributable to our royalty and stream interests for the quarter ended December 31, 2013 compared to the quarter ended December 31, 2012 is as follows:

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Revenue and Reported Production Subject to Our Royalty and Stream Interests

Quarter Ended December 31, 2013 and 2012

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