Edgar Filing: ROYAL GOLD INC

rgld_Current_Folio_10Q

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, 2019

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

For the transition period from to

Commission File Number: 001-13357

Royal Gold, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		84-0835164
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation)		Identification No.)

1660 Wynkoop Street, Suite 1000
Denver, Colorado		80202
(Address of Principal Executive Offices)		(Zip Code)

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

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

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

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


Large accelerated filer ☒	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☐
Emerging growth company ☐

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

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

There were 65,519,664 shares of the Company’s common stock, par value $0.01 per share, outstanding as of April 25, 2019.


Title of Each Class	Trading Symbol	Name of the Exchange on which Registered
Common Stock, $0.01 par value	RGLD	Nasdaq Global Select Market

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INDEX

		PAGE

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets	3
	Consolidated Statements of Operations and Comprehensive Income (Loss)	4
	Consolidated Statements of Changes in Stockholder’s Equity	5
	Consolidated Statements of Cash Flows	6
	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34

Item 4.	Controls and Procedures	34

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	35

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 3.	Defaults Upon Senior Securities	35

Item 4.	Mine Safety Disclosure	35

Item 5.	Other Information	35

Item 6.	Exhibits	35

SIGNATURES		37

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ITEM 1. FINANCIAL STATEMENTS

ROYAL GOLD, INC.

Consolidated Balance Sheets

(Unaudited, in thousands except share data)


	March 31, 2019		June 30, 2018
ASSETS
Cash and equivalents	$	215,996	$	88,750
Royalty receivables		27,554		26,356
Income tax receivable		8,790		40
Stream inventory		12,413		9,311
Prepaid expenses and other		602		1,350
Total current assets		265,355		125,807
Stream and royalty interests, net (Note 3)		2,381,592		2,501,117
Other assets		52,438		55,092
Total assets	$	2,699,385	$	2,682,016
LIABILITIES
Accounts payable	$	5,005	$	9,090
Dividends payable		17,361		16,375
Income tax payable		16,251		18,253
Withholding taxes payable		2,861		3,254
Other current liabilities		7,786		4,411
Total current liabilities		49,264		51,383
Debt (Note 4)		362,915		351,027
Deferred tax liabilities		90,321		91,147
Uncertain tax positions		36,524		33,394
Other long-term liabilities		-		13,796
Total liabilities		539,024		540,747
Commitments and contingencies (Note 11)
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 65,400,304 and 65,360,041 shares outstanding, respectively		654		654
Additional paid-in capital		2,199,349		2,192,612
Accumulated other comprehensive loss		-		(1,201)
Accumulated losses		(74,563)		(89,898)
Total Royal Gold stockholders’ equity		2,125,440		2,102,167
Non-controlling interests		34,921		39,102
Total equity		2,160,361		2,141,269
Total liabilities and equity	$	2,699,385	$	2,682,016

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

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ROYAL GOLD, INC.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(Unaudited, in thousands except share data)


	For The Three Months Ended				For The Nine Months Ended
	March 31,		March 31,		March 31,		March 31,
	2019		2018		2019		2018
Revenue (Note 5)	$	109,778	$	115,983	$	307,362	$	342,807

Costs and expenses
Cost of sales		19,075		21,345		53,764		61,627
General and administrative		6,798		8,100		24,147		24,555
Production taxes		1,006		423		3,206		1,568
Exploration costs		330		536		5,534		5,098
Depreciation, depletion and amortization		39,368		39,679		120,726		121,380
Impairment of royalty interests		—		239,364		—		239,364
Total costs and expenses		66,577		309,447		207,377		453,592

Operating income (loss)		43,201		(193,464)		99,985		(110,785)

Fair value changes in equity securities		1,781		—		(3,318)		—
Interest and other income		499		1,781		1,089		3,416
Interest and other expense		(7,499)		(8,294)		(22,786)		(25,946)
Income (loss) before income taxes		37,982		(199,977)		74,970		(133,315)

Income tax (expense) benefit		(9,388)		45,859		(11,355)		(10,044)
Net income (loss)		28,594		(154,118)		63,615		(143,359)
Net loss attributable to non-controlling interests		178		468		3,753		3,573
Net income (loss) attributable to Royal Gold common stockholders	$	28,772	$	(153,650)	$	67,368	$	(139,786)

Net income (loss)	$	28,594	$	(154,118)	$	63,615	$	(143,359)
Adjustments to comprehensive income (loss), net of tax
Unrealized change in market value of available-for-sale securities		—		(666)		—		(858)
Comprehensive income (loss)		28,594		(154,784)		63,615		(144,217)
Comprehensive loss attributable to non-controlling interests		178		468		3,753		3,573
Comprehensive income (loss) attributable to Royal Gold stockholders	$	28,772	$	(154,316)	$	67,368	$	(140,644)

Net income (loss) per share available to Royal Gold common stockholders:
Basic earnings (loss) per share	$	0.44	$	(2.35)	$	1.03	$	(2.14)
Basic weighted average shares outstanding		65,398,369		65,307,324		65,389,499		65,283,019
Diluted earnings (loss) per share	$	0.44	$	(2.35)	$	1.03	$	(2.14)
Diluted weighted average shares outstanding		65,515,234		65,307,324		65,494,902		65,283,019
Cash dividends declared per common share	$	0.265	$	0.25	$	0.78	$	0.74

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

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ROYAL GOLD, INC.

Consolidated Statements of Changes in Stockholder’s Equity

(unaudited, in thousands except share data)


	Royal Gold Stockholders
						Accumulated
				Additional		Other
	Common Shares			Paid-In		Comprehensive		Accumulated		Non-controlling		Total
	Shares	Amount		Capital		Income (Loss)		(Losses) Earnings		Interests		Equity
Balance at December 31, 2018	65,396,339	$	654	$	2,197,254	$	—	$	(86,238)	$	35,300	$	2,146,970
Stock-based compensation and related share issuances	3,965		—		1,675		—		—		—		1,675
Other	—		—		—		—		266		—		266
Contributions from non-controlling interests	—		—		420		—		—		(201)		219
Net income	—		—		—		—		28,772		(178)		28,594
Other comprehensive loss	—		—		—		—		—		—		—
Dividends declared	—		—		—		—		(17,363)		—		(17,363)
Balance at March 31, 2019	65,400,304	$	654	$	2,199,349	$	—	$	(74,563)	$	34,921	$	2,160,361

	Royal Gold Stockholders
						Accumulated
				Additional		Other
	Common Shares			Paid-In		Comprehensive		Accumulated		Non-controlling		Total
	Shares	Amount		Capital		Income (Loss)		(Losses) Earnings		Interests		Equity
Balance at December 31, 2017	65,307,285	$	653	$	2,186,648	$	687	$	69,842	$	41,987	$	2,299,817
Stock-based compensation and related share issuances	1,733		—		1,603		—		—		—		1,603
Contributions from non-controlling interests	—		—		—		—		—		134		134
Net loss	—		—		—		—		(153,650)		(468)		(154,118)
Other comprehensive loss	—		—		—		(666)		—		—		(666)
Dividends declared	—		—		—		—		(16,365)		—		(16,365)
Balance at March 31, 2018	65,309,018	$	653	$	2,188,251	$	21	$	(100,173)	$	41,653	$	2,130,405

	Royal Gold Stockholders
						Accumulated
				Additional		Other
	Common Shares			Paid-In		Comprehensive		Accumulated		Non-controlling		Total
	Shares	Amount		Capital		Income (Loss)		(Losses) Earnings		Interests		Equity
Balance at June 30, 2018	65,360,041	$	654	$	2,192,612	$	(1,201)	$	(89,898)	$	39,102	$	2,141,269
Stock-based compensation and related share issuances	40,263		—		3,527		—		—		—		3,527
Other	—		—		—		—		266		—		266
Contributions from non-controlling interests	—		—		3,210		—		—		(428)		2,782
Net loss	—		—		—		—		67,368		(3,753)		63,615
Other comprehensive loss	—		—		—		1,201		(1,201)		—		—
Dividends declared	—		—		—		—		(51,098)		—		(51,098)
Balance at March 31, 2019	65,400,304	$	654	$	2,199,349	$	—	$	(74,563)	$	34,921	$	2,160,361

	Royal Gold Stockholders
						Accumulated
				Additional		Other
	Common Shares			Paid-In		Comprehensive		Accumulated		Non-controlling		Total
	Shares	Amount		Capital		Income (Loss)		(Losses) Earnings		Interests		Equity
Balance at June 30, 2017	65,179,527	$	652	$	2,185,796	$	879	$	88,050	$	44,887	$	2,320,264
Stock-based compensation and related share issuances	129,491		1		2,455		—		—		—		2,456
Contributions from non-controlling interests	—		—		—		—		—		339		339
Net loss	—		—		—		—		(139,786)		(3,573)		(143,359)
Other comprehensive loss	—		—		—		(858)		—		—		(858)
Dividends declared	—		—		—		—		(48,437)		—		(48,437)
Balance at March 31, 2018	65,309,018	$	653	$	2,188,251	$	21	$	(100,173)	$	41,653	$	2,130,405

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

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ROYAL GOLD, INC.

Consolidated Statements of Cash Flows

(Unaudited, in thousands)


	For The Nine Months Ended
	March 31,		March 31,
	2019		2018
Cash flows from operating activities:
Net income (loss)	$	63,615	$	(143,359)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation, depletion and amortization		120,726		121,380
Amortization of debt discount and issuance costs		11,882		11,200
Non-cash employee stock compensation expense		5,510		5,958
Fair value changes in equity securities		3,318		—
Deferred tax benefit		(5,329)		(31,583)
Impairment of royalty interests		—		239,364
Other		—		(199)
Changes in assets and liabilities:
Royalty receivables		(1,198)		(909)
Stream inventory		(3,102)		(4,816)
Income tax receivable		(8,750)		21,020
Prepaid expenses and other assets		2,474		3,224
Accounts payable		(4,326)		(939)
Income tax payable		(2,002)		6,779
Withholding taxes payable		(393)		227
Uncertain tax positions		3,130		10,989
Other liabilities		(4,646)		13,473
Net cash provided by operating activities	$	180,909	$	251,809

Cash flows from investing activities:
Acquisition of stream and royalty interests		(1,055)		(1,012)
Purchase of equity securities		(3,573)		—
Other		(157)		(1,251)
Net cash used in investing activities	$	(4,785)	$	(2,263)

Cash flows from financing activities:
Repayment of revolving credit facility		—		(175,000)
Net payments from issuance of common stock		(1,982)		(3,502)
Common stock dividends		(50,114)		(47,755)
Contributions from non-controlling interest		3,210		—
Other		8		240
Net cash used in financing activities	$	(48,878)	$	(226,017)
Net increase in cash and equivalents		127,246		23,529
Cash and equivalents at beginning of period		88,750		85,847
Cash and equivalents at end of period	$	215,996	$	109,376

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

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements

(Unaudited)

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

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

Summary of Significant Accounting Policies

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

Recently Adopted Accounting Standards

Revenue Recognition

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

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

For the three and nine months ended March 31, 2019, there was no impact to our reported revenue, operating costs and expenses or net income attributable to Royal Gold common stockholders as a result of adopting ASC 606, as compared to legacy revenue guidance under U.S. GAAP. In addition, no cumulative catch-up adjustment to accumulated losses was required on July 1, 2018 as a result of adopting ASC 606. Please refer to Note 5 for additional discussion.

Recognition and Measurement of Financial Instruments

On July 1, 2018, we adopted Accounting Standards Update (“ASU”) 2016-01 – Financial Instruments, which is guidance on the recognition and measurement of financial instruments. The amended guidance requires, among other things, that equity securities previously classified as available-for-sale be measured at fair value with changes in fair value recognized in net income rather than other comprehensive income (loss) as required under previous guidance. Upon adoption, the Company recorded a cumulative-effect adjustment in Accumulated losses of $1.2 million. The increase and decrease in fair value of our equity securities was approximately $1.8 million and $3.3 million, respectively, for the three and nine months ended March 31, 2019 and is included in Fair value changes in equity securities on our consolidated statements of operations and comprehensive income (loss). The carrying value of the Company’s equity securities as of March 31,

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

2019 and June 30, 2018 was $19.5 million and $19.2 million, respectively, and is included in Other assets on the Company’s consolidated balance sheets. As of March 31, 2019, the Company owns 809,744 common shares of Contango Ore, Inc. (“CORE”) and 3,597,823 common shares of Rubicon Minerals Corporation.

Recently Issued Accounting Standards

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842) which requires recognition of right-of-use assets and lease payment liabilities on the balance sheet by lessees for virtually all leases currently classified as operating leases. Under ASU 2016-02, companies are permitted to make a policy election to not recognize lease assets or liabilities when the term of the lease is less than twelve months. The Company is evaluating the impacts of ASU 2016-02, which includes an analysis of non-cancelable leases, joint venture agreements and other existing arrangements that may contain a lease component. The Company has substantially completed the process of identifying contracts to which the new guidance applies and is evaluating those identified contracts to determine the impacts of ASC 2016-02 at adoption. Further, the Company is also evaluating policies, internal controls, and processes that will be necessary to support the additional accounting and disclosure requirements. The Company will adopt ASU 2016-02 on July 1, 2019, using the modified retrospective approach. Adoption of this guidance is anticipated to result in an insignificant increase in right-of-use assets and related liabilities on the Company’s consolidated balance sheets; however, the full impact to the Company’s financial statements and related footnote disclosures is still being evaluated.

In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”). ASU 2018-11 provides an additional transition method for adopting ASU 2016-02, as well as provides lessors with a practical expedient when applying ASU 2016-02 to certain leases. The Company anticipates making a policy election in connection with adopting ASU 2018-11, which will eliminate the need for adjusting prior period comparable financial statements prepared under current lease accounting guidance. The Company will adopt ASU 2018-11 at the same time it adopts ASU 2016-02.

2. ACQUISITION

Acquisition of Silver Stream on Khoemacau Copper Project

On February 25, 2019, the Company announced that its wholly-owned subsidiary, RGLD Gold AG (“RGLD Gold”), entered into a life of mine purchase and sale agreement for silver produced from the Khoemacau Copper Project (“Khoemacau” or the “Project”) in Botswana with Khoemacau Copper Mining (Pty.) Limited (“KCM”), a wholly-owned subsidiary of Cupric Canyon Capital LP (together with all its subsidiaries including KCM, “Cupric”), a private company owned by management and funds advised by Global Natural Resource Investments. Pursuant to the purchase and sale agreement, RGLD Gold will make advance payments to Cupric totaling $212 million for 80% of the silver produced from Khoemacau until certain delivery thresholds are met (the “Silver Stream”), and at Cupric’s option, up to an additional $53 million in advance payments for up to the remaining 20% of the silver produced (the “Option Stream”). The stream rate will drop by 50% (to 40% of the silver produced) upon the 32 million silver ounces under the Silver Stream, or to 50% of the silver produced upon delivery of 40 million silver ounces in the event Cupric exercises delivery of the entire Option Stream. RGLD Gold will pay 20% of the spot price of silver for each ounce delivered; however, depending on the achievement by Cupric of mill expansion throughput levels 30% above current mill design capacity, RGLD Gold will pay higher ongoing cash payments for silver ounces delivered in excess of specific annual thresholds.

RGLD Gold’s first advance payment under the Silver Stream is expected to occur after $100 million of net new debt and equity funding has been spent on the Project by Cupric. The $212 million in advance payments under the Silver Stream will be made in quarterly installments as project development advances according to the following approximate schedule: $60 million in the third and fourth quarters of calendar 2019, $125 million in calendar 2020 and the balance in calendar 2021. RGLD Gold will fund the transaction through cash on hand or cash advances from Royal Gold.

Separate from the Silver Stream and Option Stream, and subject to various conditions, RGLD Gold will make available up to $25 million to Cupric toward the end of development of Khoemacau in the form of a subordinated debt facility. Any

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

amounts drawn under the facility would carry interest at LIBOR + 11% and have a term of seven years. RGLD Gold will have the right to force repayment of the facility upon certain events.

The Company anticipates accounting for the Silver Stream and Option Stream (if exercised by Cupric) as an asset acquisition, consistent with the treatment of our other acquired streams. The $212 million in advance payments for the Silver Stream and $53 million in advance payments for the Option Stream, plus direct transaction costs, will be recorded as a development stage stream interest within Stream and royalty interests, net on our consolidated balance sheets in the period advance payments occur.

3. STREAM AND ROYALTY INTERESTS, NET

The following tables summarize the Company’s stream and royalty interests, net as of March 31, 2019 and June 30, 2018.


As of March 31, 2019 (Amounts in thousands):	Cost		Accumulated Depletion		Net
Production stage stream interests:
Mount Milligan	$	790,635	$	(172,737)	$	617,898
Pueblo Viejo		610,404		(145,955)		464,449
Andacollo		388,182		(79,513)		308,669
Rainy River		175,727		(12,218)		163,509
Wassa and Prestea		146,475		(54,628)		91,847
Total production stage stream interests		2,111,423		(465,051)		1,646,372
Production stage royalty interests:
Voisey's Bay		205,724		(94,055)		111,669
Peñasquito		99,172		(40,496)		58,676
Holt		34,612		(22,243)		12,369
Cortez		20,878		(11,859)		9,019
Other		487,224		(382,702)		104,522
Total production stage royalty interests		847,610		(551,355)		296,255
Total production stage stream and royalty interests		2,959,033		(1,016,406)		1,942,627

Development stage stream interests:
Other		12,038		—		12,038

Development stage royalty interests:
Cortez		59,803		—		59,803
Other		70,952		—		70,952
Total development stage royalty interests		130,755		—		130,755
Total development stage stream and royalty interests		142,793		—		142,793

Exploration stage royalty interests:
Pascua-Lama		177,690		—		177,690
Other		118,482		—		118,482
Total exploration stage royalty interests		296,172		—		296,172
Total stream and royalty interests, net	$	3,397,998	$	(1,016,406)	$	2,381,592

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)


As of June 30, 2018 (Amounts in thousands):	Cost		Accumulated Depletion		Impairments		Net
Production stage stream interests:
Mount Milligan	$	790,635	$	(152,833)	$	—	$	637,802
Pueblo Viejo