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, 2016 filed with the Securities and Exchange Commission (the “SEC”) on August 11, 2016 (the “Fiscal 2016 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,” “NVR,” “metal stream (or “stream”)” and other types of royalty or similar interests throughout this MD&A. These terms are defined in our Fiscal 2016 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 2017 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 precious 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, 2017, we owned stream interests on four producing properties and two development stage properties. As discussed further in our Fiscal 2016 10-K, we closed and funded approximately $1.4 billion in stream interests in our fiscal year 2016, including stream interests relating to Pueblo Viejo, Andacollo, Wassa and Prestea, and Rainy River. Stream interests accounted for approximately 72% and 71%, respectively, of our total revenue for the three and nine months ended March 31, 2017, and 68% and 63%, respectively, of our total revenue for the three and nine months ended March 31, 2016. 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, 2017, we owned royalty interests on 34 producing properties, 20 development stage properties and 133 exploration stage properties, of which we consider 51 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 29%, respectively, of our total revenue for the three and nine months ended March 31, 2017, and 32% and 37%, respectively, of our total revenue for the three and nine months ended March 31, 2016.
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, 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 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, analysis of technical, financial and other confidential information, 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, 2017 and 2016, gold, silver and copper price averages and percentage of revenue by metal were as follows:
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Three Months Ended
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Nine Months Ended
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March 31, 2017
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March 31, 2016
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March 31, 2017
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March 31, 2016
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Metal
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Average
Price
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Percentage of Revenue
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Average
Price
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Percentage
of Revenue
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Average
Price
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Percentage of Revenue
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Average
Price
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Percentage
of Revenue
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Gold ($/ounce)
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$
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1,219
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86%
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$
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1,183
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90%
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$
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1,260
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86%
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$
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1,138
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87%
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Silver ($/ounce)
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$
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17.42
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7%
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$
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14.85
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2%
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$
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18.09
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8%
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$
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14.84
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2%
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Copper ($/pound)
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$
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2.65
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3%
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$
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2.12
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5%
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$
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2.40
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3%
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$
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2.24
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4%
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Other
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N/A
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4%
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N/A
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3%
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N/A
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3%
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N/A
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7%
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Recent Business Developments
Mount Milligan Stream Amendment
On October 20, 2016, Centerra Gold Inc. (“Centerra”) and Thompson Creek Metals Company Inc. (“Thompson Creek”) completed the Plan of Arrangement (the “Arrangement”) previously announced on July 5, 2016, pursuant to which Centerra acquired all of the issued and outstanding common shares of Thompson Creek. RGLD Gold AG’s (“RGLD Gold”) streaming interest at Mount Milligan was amended (the “amendment”) concurrently with the closing of the Arrangement.
Under the terms of the amendment, RGLD Gold’s 52.25% gold stream at Mount Milligan was amended to a 35% gold stream and an 18.75% copper stream. RGLD Gold will continue to pay $435 per ounce of gold delivered and will pay 15% of the spot price per metric tonne of copper delivered.
Mount Milligan gold in concentrate in transit prior to October 20, 2016 was delivered to RGLD Gold under the current 52.25% stream. Under the terms of both the original and amended agreements, there is a maximum of five months between concentrate shipment and final settlement, and RGLD Gold began receiving gold and copper deliveries reflecting the amended stream agreement in April 2017.
In connection with the amendment, RGLD Gold’s first ranking security over 52.25% of gold produced from the Mount Milligan assets was amended to provide for first ranking security over 35% of produced gold and 18.75% of produced copper. RGLD Gold’s other existing security over the Mount Milligan assets remains unaffected.
Acquisition of Additional Royalty Interests at Cortez
On September 19, 2016, Royal Gold, through its wholly-owned subsidiary, Denver Mining Finance Company, Inc., acquired a 3.75% Net Value Royalty (“NVR”) covering a significant area of Barrick Gold Corporation’s (“Barrick”) Cortez mine, including the Crossroads deposit, from a private party seller for total consideration of $70 million. With this acquisition, Royal Gold’s interests at Cortez Crossroads comprise a 4.46% NVR and a 5% sliding-scale Gross Smelter Return (“GSR”) royalty at current gold prices. Royal Gold’s interests on production from the Pipeline and South Pipeline
deposits as well as portions of the Gap deposit are comprised of a 4.85% NVR and a 5.71% GSR royalty at current gold prices.
As of December 31, 2016, proven and probable reserves subject to Royal Gold’s interests at Cortez were estimated at 3.6 million ounces of gold, including approximately 2.7 million gold ounces at Crossroads. Waste stripping at Crossroads is underway and production is expected to begin in calendar 2018.
Principal Stream and Royalty Interests
The Company considers both historical and future potential revenues in determining which stream and royalty interests in our portfolio are principal to our business. Estimated future potential revenues from both producing and development properties are based on a number of factors, including reserves subject to our stream and royalty interests, production estimates, feasibility studies, metal price assumptions, mine life, legal status and other factors and assumptions, any of which could change and could cause the Company to conclude that one or more of such stream and royalty interests are no longer principal to our business. Currently, our principal producing and development stream and royalty interests are listed alphabetically in the following tables.
Please refer to our Fiscal 2016 10-K for further discussion of our principal producing and development stream and royalty interests.
Principal Producing Properties
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Stream or royalty interests
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Mine
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Location
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Operator
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(Gold unless otherwise stated)
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Andacollo
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Region IV, Chile
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Compañía Minera Teck Carmen de Andacollo (“Teck”)
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Gold stream - 100% of gold produced (until 900,000 ounces delivered; 50% thereafter)
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Cortez
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Nevada, USA
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Barrick
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GSR1: 0.40% to 5.0% sliding-scale GSR
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GSR2: 0.40% to 5.0% sliding-scale GSR
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GSR3: 0.71% GSR
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NVR1: 4.85% NVR; 4.46% NVR (Crossroads)
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Mount Milligan
(1)
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British Columbia, Canada
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Centerra
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Gold stream - 35.00% of payable gold
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Copper stream - 18.75% of payable copper
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Peñasquito
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Zacatecas, Mexico
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Goldcorp Inc. (“Goldcorp”)
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2.0% NSR (gold, silver, lead, zinc)
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Pueblo Viejo
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Sanchez Ramirez, Domincan Republic
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Barrick (60%)
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Gold stream - 7.5% of gold produced (until 990,000 ounces delivered; 3.75% thereafter)
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Silver stream - 75% of silver produced (until 50.0 million ounces delivered; 37.5% thereafter)
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Wassa and Prestea
(2)
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Western Region of Ghana
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Golden Star Resources Ltd. (“Golden Star”)
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Gold stream - 9.25% of gold produced
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(1)
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Refer to Recent Business Developments above for discussion on the amendment to our Mount Milligan stream. The Company’s gold stream interest was 52.25% prior to October 20, 2016. Pursuant to the amendment to the Mount Milligan streaming agreement, the Company has a 35.0% gold stream and a 18.75% copper stream. Mount Milligan gold in concentrate in transit prior to October 20, 2016, was delivered to RGLD Gold under the 52.25% stream.
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(2)
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Gold stream percentage increases to 10.5% upon the earlier of (i) December 31, 2017 or (ii) the date at which Wassa and Prestea underground projects achieve commercial production.
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Principal Development Stage Properties
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Stream or royalty interests
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Mine
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Location
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Operator
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(Gold unless otherwise stated)
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Rainy River
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Ontario, Canada
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New Gold, Inc. (“New Gold”)
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Gold stream - 6.5% of gold produced (until 230,000 ounces delivered; 3.25% thereafter)
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Silver stream - 60% of silver produced (until 3.1 million ounces delivered; 30% thereafter)
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Pascua-Lama
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Region III, Chile
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Barrick
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0.78% to 5.45% sliding-scale NSR
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1.09% fixed rate royalty (copper)
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Operators’ Production Estimates by Stream and Royalty Interest for Calendar 2017
We received annual production estimates from many of the operators of our producing mines during the first calendar quarter of 2017. The following table shows such production estimates for our principal producing properties for calendar 2017 as well as the actual production reported to us by the various operators through March 31, 2017. 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 or development stage properties.
Operators’ Estimated and Actual Production by Stream and Royalty Interest for Calendar 2017
Principal Producing Properties
For the period January 1, 2017 through March 31, 2017
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Calendar 2017 Operator’s Production
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Calendar 2017 Operator's Production
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Estimate
(1)
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Actual
(2)
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Gold
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Silver
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Base Metals
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Gold
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Silver
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Base Metals
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Stream/Royalty
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(oz.)
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(oz.)
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(lbs.)
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(oz.)
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(oz.)
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(lbs.)
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Stream:
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Andacollo
(3)
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61,600
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-
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-
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14,600
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-
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-
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Mount Milligan
(4)
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260,000-290,000
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-
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-
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45,200
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-
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-
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Copper
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55 - 65 million
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12.6 million
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Pueblo Viejo
(5)
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625,000 - 650,000
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Not provided
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143,000
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Not provided
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-
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Wassa and Prestea
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255,000 - 280,000
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57,800
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Royalty:
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Cortez GSR1
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102,200
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-
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-
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11,200
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-
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-
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Cortez GSR2
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1,600
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-
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-
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100
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-
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-
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Cortez GSR3
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103,800
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-
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-
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11,300
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-
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-
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Cortez NVR1
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63,900
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-
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-
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4,700
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-
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-
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Peñasquito
(6)
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410,000
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Not provided
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-
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137,000
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4.84 million
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-
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Lead
(6)
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Not provided
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32.4 million
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Zinc
(6)
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Not provided
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80.7 million
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(1)
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Production estimates received from our operators are for calendar 2017. 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 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 2016 10-K for information regarding factors that could affect actual results.
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(2)
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Actual production figures shown are from our operators and cover the period January 1, 2017 through March 31, 2017, unless otherwise noted.
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(3)
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The estimated and actual production figures shown for Andacollo are contained gold in concentrate.
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(4)
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The estimated and actual production figures shown for Mount Milligan are payable gold in concentrate.
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(5)
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The estimated and actual production figures shown are payable gold in doré and represent Barrick’s 60% interest in Pueblo Viejo. The operator did not provide estimated and actual silver production.
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(6)
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The estimated and actual gold production reflects payable gold in concentrate. The operator did not provide estimated silver, lead and zinc production.
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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 10,900 ounces of gold for the three months ended March 31, 2017, compared to approximately 8,300 ounces for the three months ended March 31, 2016.
Teck reported higher production during the March 2017 quarter, compared to the prior year quarter, primarily as a result of improved grades and increased mill throughput. The current life of mine for Andacollo is expected to continue until 2034.
Mount Milligan
Gold stream deliveries from Mount Milligan were approximately 22,700 ounces for the three months ended March 31, 2017, compared to approximately 17,400 ounces for the three months ended March 31, 2016. Centerra stated production during the current period was
consistent with plan, which has 64% of payable copper production and 60% of payable gold production in the second half of 2017.
The secondary crusher is now fully operational and a part of the comminution circuit. Centerra continues to evaluate the comminution circuit to optimize the feed. As Centerra continues to focus on optimizing the mine and mill to increase recovery and improve throughput, they also undertook an operational review process with subject matter experts within their organization who identified several value adding projects. When these value added projects are implemented, Centerra expects to improve recoveries, throughput and unit cost performance by the end of calendar 2017.
Pueblo Viejo
Gold stream deliveries from Pueblo Viejo were approximately 10,400 ounces of gold for the three months ended March 31, 2017, compared to approximately 10,600 ounces for the three months ended March 31, 2016. Silver stream deliveries were approximately 373,600 ounces of silver for the three months ended March 31, 2017, compared to approximately 209,800 ounces for the three months ended March 31, 2016. RGLD Gold began receiving silver deliveries during the quarter ended March 31, 2016.
Lower production during the March 2017 quarter was due primarily to lower tonnage mined and processed, combined with lower head grades, which were attributed to lower open pit equipment utilization and lower processing throughput due to the timing of autoclave shutdowns. The impact was partially offset by improved gold recoveries.
Barrick reiterated their Pueblo Viejo production guidance for calendar 2017 of between 625,000 ounces and 650,000 ounces of gold.
Rainy River
New Gold reported that both the project schedule and the capital cost estimate remain in line with the updated plan announced January 30, 2017. New Gold further reported mining activities at Rainy River progressed well during the March 2017 quarter, with a mining rate averaging over 110,000 tonnes per day, the overall earthworks are approximately 70% complete, the primary crusher and conveyor system are approximately 95% complete and the installation of mechanical, piping, electrical and instrumentation in the processing facilities are approximately 85% complete.
New Gold also reported that commissioning of the crusher commenced in March 2017 with the first crush expected in early May 2017; the commissioning of the ball and SAG mills should start during the June 2017 quarter and be completed in August 2017; the refining portion of the circuit should be completed and ready to begin commissioning early in the September 2017 quarter; and that dry and wet commissioning of the full process circuit is scheduled to be completed in August 2017.
New Gold continues to work towards obtaining an amendment to Schedule 2 of the Metal Mining Effluent Regulations, required to close two small creeks and deposit tailings, which is now expected to be received in January 2018. As previously reported, New Gold is presently constructing a starter tailings cell, located within the broader tailings management area that does not require a Schedule 2 amendment. This will allow New Gold to commence operations prior to completion of the Schedule 2 amendment. Based on its location and scale, the starter cell would provide capacity for approximately six months of tailings. In addition, New Gold is finalizing its evaluation of an approach to constructing the creek closures which incorporates sheet pile at the center of the portion of the dam which will cover the creeks. The purpose of this approach is both to reduce the construction time after receipt of the Schedule 2 amendment, and, most importantly, to be able to complete the work regardless of the weather conditions. The approach is expected to require provincial and Canadian federal regulatory approvals.
Wassa and Prestea
Gold stream deliveries from Wassa and Prestea were approximately 5,700 ounces of gold for the three months ended March 31, 2017, compared to approximately 4,400 ounces of gold for the three months ended March 31, 2016.
Golden Star declared commercial production at Wassa Underground on January 1, 2017, and Golden Star reported gold production continued to ramp up during the current quarter. During the three months ended March 31, 2017, mining operations were primarily in the F Shoot, the more moderate grade zone of the deposit. In late March 2017, Golden Star began accessing the B Shoot, the higher grade zone of the deposit, for the first time via longitudinal stoping. Golden Star reported that development of the first stope in the high grade West Reef at Prestea underground commenced. Also during the current quarter, mining commenced at the Mampon deposit, a quarter earlier than expected.
Golden Star expects gold production to be weighted towards the second half of calendar 2017. Accordingly, gold production in the June 2017 quarter is expected to be in line with the production results for the March 2017 quarter.
Royalty Interests
Cortez
Production attributable to our royalty interest at Cortez decreased approximately 39% over the prior year quarter, in line with the mine plan. Waste stripping at Crossroads, which is subject to our royalty interest, restarted in October 2016 and is currently ongoing.
Please refer to “Recent Business Developments” earlier in this MD&A for discussion on the acquisition of additional royalty interests at Cortez.
Peñasquito
Gold, lead and zinc production attributable to our royalty interest at Peñasquito increased approximately 14%, 4% and 21%, respectively during the three months ended March 31, 2017, when compared to the three months ended March 31, 2016. Silver production attributable to our royalty interest was in line with the prior year quarter.
Goldcorp reported higher production during the current quarter when compared to the prior year quarter, primarily due to higher grade ore as a result of mine sequencing in Phases 5 and 6, and higher mill throughput as a result of improved operational discipline. Goldcorp expects higher ore grade through the first half of calendar 2017, after which mill feed is expected to consist of lower grade ore and stockpiled material for the remainder of calendar 2017.
Goldcorp also reported that the Pyrite Leach Project achieved construction progress of 6% and engineering progress of 81% at the end of the March 2017 quarter. As part of the Pyrite Leach Project, a carbon pre-flotation facility is being
constructed which is expected to allow Peñasquito to process ore which was previously considered uneconomic, including significant amounts already in stockpiles.
Results of Operations
Quarter Ended March 31, 2017, Compared to Quarter Ended March 31, 2016
For the quarter ended March 31, 2017, we recorded net income attributable to Royal Gold stockholders of $23.7 million, or $0.36 per basic and diluted share, as compared to a net loss attributable to Royal Gold stockholders of $67.7 million, or ($1.04) per basic and diluted share, for the quarter ended March 31, 2016. The increase in our earnings per share was primarily attributable to an increase in revenue during the current period, as discussed below, and impairment charges of approximately $99.0 million (including a royalty receivable write down of approximately $2.9 million) on our stream interest at the Phoenix Gold Project and certain other non-principal royalty interests in the prior period. The effect of the impairment charges during the quarter ended March 31, 2016, was $1.33 per basic share, after taxes.
For the quarter ended March 31, 2017, we recognized total revenue of $107.0 million, which is 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. This is compared to total revenue of $93.5 million for the three months ended March 31, 2016, which was comprised of stream revenue of $63.4 million and royalty revenue of $30.1 million, at an average gold price of $1,183 per ounce, an average silver price of $14.85 per ounce and an average copper price of $2.12 per pound for the quarter ended March 31, 2016. Revenue and the corresponding production attributable to our stream and royalty interests for the quarter ended March 31, 2017 compared to the quarter ended March 31, 2016 is as follows:
Revenue and Reported Production Subject to Our Stream and Royalty Interests
Quarter Ended March 31, 2017 and 2016
(In thousands, except reported production ozs. and lbs.)
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Three Months Ended
|
|
Three Months Ended
|
|
|
|
|
March 31, 2017
|
|
March 31, 2016
|
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Reported
|
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Reported
|
Stream/Royalty
|
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Metal(s)
|
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Revenue
|
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Production
(1)
|
|
Revenue
|
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Production
(1)
|
Stream
(2)
:
|
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|
|
|
|
|
|
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|
|
|
|
Mount Milligan
|
|
Gold
|
|
$
|
35,112
|
|
28,900
|
oz.
|
|
$
|
29,806
|
|
25,400
|
oz.
|
Pueblo Viejo
(3)
|
|
|
|
$
|
24,524
|
|
|
|
|
$
|
13,608
|
|
|
|
|
|
Gold
|
|
|
|
|
15,600
|
oz.
|
|
|
|
|
11,800
|
oz.
|
|
|
Silver
|
|
|
|
|
322,000
|
oz.
|
|
|
|
|
N/A
|
|
Andacollo
|
|
Gold
|
|
$
|
10,398
|
|
8,500
|
oz.
|
|
$
|
15,730
|
|
13,500
|
oz.
|
Wassa and Prestea
|
|
Gold
|
|
$
|
6,563
|
|
5,400
|
oz.
|
|
$
|
4,155
|
|
3,500
|
oz.
|
Other
(4)
|
|
Gold
|
|
$
|
-
|
|
N/A
|
|
|
$
|
140
|
|
100
|
oz.
|
Total stream revenue
|
|
|
|
$
|
76,597
|
|
|
|
|
$
|
63,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peñasquito
|
|
|
|
$
|
6,981
|
|
|
|
|
$
|
5,210
|
|
|
|
|
|
Gold
|
|
|
|
|
137,500
|
oz.
|
|
|
|
|
120,300
|
oz.
|
|
|
Silver
|
|
|
|
|
4.8
|
Moz.
|
|
|
|
|
4.8
|
Moz.
|
|
|
Lead
|
|
|
|
|
31.3
|
Mlbs.
|
|
|
|
|
30.2
|
Mlbs.
|
|
|
Zinc
|
|
|
|
|
88.5
|
Mlbs.
|
|
|
|
|
73.1
|
Mlbs.
|
Cortez
|
|
Gold
|
|
$
|
1,068
|
|
11,300
|
oz.
|
|
$
|
1,853
|
|
18,400
|
oz.
|
Other
(4)
|
|
Various
|
|
$
|
22,326
|
|
N/A
|
|
|
$
|
22,985
|
|
N/A
|
|
Total royalty revenue
|
|
|
|
$
|
30,375
|
|
|
|
|
$
|
30,048
|
|
|
|
Total Revenue
|
|
|
|
$
|
106,972
|
|
|
|
|
$
|
93,487
|
|
|
|
|
(1)
|
|
Reported production relates to the amount of metal sales, subject to our stream and royalty interests, for the three months ended March 31, 2017 and 2016, and may differ from the operators’ public reporting.
|
|
(2)
|
|
Refer to “Recent Business Developments” and “Property Developments” above for further discussion on our principal stream and royalty interests.
|
|
(3)
|
|
The first silver stream deliveries were in March 2016, with the first silver sales made during the June 2016 quarter.
|
|
(4)
|
|
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, 2017, compared with the three months ended March 31, 2016, resulted primarily from an increase in our stream revenue and an increase in the average gold and silver prices. The increase in our stream revenue was primarily attributable to increased gold production at Mount Milligan and new silver sales from our Pueblo Viejo streaming interest. Our first silver stream delivery from Pueblo Viejo was in March 2016, and the first revenue from Pueblo Viejo silver sales was recognized in the June 2016 quarter. The increase in stream revenue at Pueblo Viejo and Mount Milligan was partially offset by a production decrease at Andacollo. Gold and silver ounces purchased and sold during the three months ended March 31, 2017 and 2016, and gold and silver ounces in inventory as of March 31, 2017, and June 30, 2016, for our streaming interests were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
As of
|
|
As of
|
|
|
March 31, 2017
|
|
March 31, 2016
|
|
March 31, 2017
|
|
June 30, 2016
|
Gold Stream
|
|
Purchases (oz.)
|
|
Sales (oz.)
|
|
Purchases (oz.)
|
|
Sales (oz.)
|
|
Inventory (oz.)
|
|
Inventory (oz.)
|
Mount Milligan
|
|
22,700
|
|
28,900
|
|
17,400
|
|
25,400
|
|
-
|
|
7,500
|
Andacollo
|
|
10,900
|
|
8,500
|
|
8,300
|
|
13,500
|
|
2,500
|
|
-
|
Pueblo Viejo
|
|
10,400
|
|
15,600
|
|
10,600
|
|
11,800
|
|
10,500
|
|
11,000
|
Wassa and Prestea
|
|
5,700
|
|
5,400
|
|
4,400
|
|
3,500
|
|
1,900
|
|
1,300
|
Phoenix Gold
|
|
-
|
|
-
|
|
100
|
|
100
|
|
-
|
|
-
|
Total
|
|
49,700
|
|
58,400
|
|
40,800
|
|
54,300
|
|
14,900
|
|
19,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
As of
|
|
As of
|
|
|
March 31, 2017
|
|
March 31, 2016
|
|
March 31, 2017
|
|
June 30, 2016
|
Silver Stream
|
|
Purchases (oz.)
|
|
Sales (oz.)
|
|
Purchases (oz.)
|
|
Sales (oz.)
|
|
Inventory (oz.)
|
|
Inventory (oz.)
|
Pueblo Viejo
|
|
373,600
|
|
322,000
|
|
209,800
|
|
-
|
|
375,000
|
|
323,700
|
Our royalty revenue increased during the quarter ended March 31, 2017, compared with the quarter ended March 31, 2016, primarily due to an increase in gold production at Peñasquito and an increase in the average gold and silver prices during the current period. Please refer to “Recent Business Developments” and “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 increased to $22.4 million for the three months ended March 31, 2017 from $17.9 million for the three months ended March 31, 2016. The increase was primarily due to increased gold sales from Mount Milligan and increased gold and silver sales from Pueblo Viejo. Cost of sales is specific to our stream agreements and is the result of RGLD Gold’s purchase of gold or silver for a cash payment. The cash payment for 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 or silver spot price near the date of metal delivery.
General and administrative expenses decreased to $5.4 million for the three months ended March 31, 2017 from $7.7 million for the three months ended March 31, 2016. The decrease during the current quarter was primarily due to an decrease in non-cash stock based compensation expense of approximately $2.0 million as a result of management’s change in estimate for the number of performance shares that are expected to vest.
Interest and other income decreased to $1.3 million for the three months ended March 31, 2017 from $3.1 million for the three months ended March 31, 2016. The decrease was primarily due to a realized gain on the sale of Seabridge Gold, Inc. common shares of $0.7 million during the prior year quarter and a decrease in the fair value of our Golden Star warrants of approximately $0.8 million when compared to the three months ended March 31, 2016.
During the three months ended March 31, 2017, we recognized income tax expense totaling $6.5 million compared with an income tax benefit of $8.3 million during the three months ended March 31, 2016. This resulted in an effective tax rate of 23.2% in the current period, compared with 10.6% in the quarter ended March 31, 2016. The increase in the effective tax rate for the three months ended March 31, 2017 is primarily related to the effects of the impairment charges recorded during the three months ended March 31, 2016.
Nine months ended March 31, 2017, Compared to Nine months ended March 31, 2016
For the nine months ended March 31, 2017, we recorded net income attributable to Royal Gold stockholders of $81.5 million, or $1.25 per basic and diluted share, as compared to a net loss attributable to Royal Gold stockholders of $97.6 million, or ($1.50) per basic and diluted share, for the nine months ended March 31, 2016. The increase in our earnings per share was primarily attributable to an increase in our revenue in the current period, as discussed below, impairment charges of approximately $99.0 million (including a royalty receivable write down of approximately $2.9 million) on our stream interest at the Phoenix Gold Project and certain other non-principal royalty interests in the prior period, and the impact of $56 million of additional tax expense in the prior period related to the termination of the Andacollo royalty interest and the liquidation of our Chilean subsidiary. The effect of the impairment charges during the quarter ended March 31, 2016, was $1.33 per basic share, after taxes. The effect of the tax expense attributable to the termination of the Andacollo royalty interest during the quarter ended September 30, 2015, was $0.86 per share.
For the nine months ended March 31, 2017, we recognized total revenue of $331.9 million, 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. This is compared to total revenue of $265.7 million for the nine months ended March 31, 2016, which was comprised of stream revenue of $168.6 million and royalty revenue of $97.1 million, at an average gold price of $1,138 per ounce, an average silver price of $14.84 per ounce and an average copper price of $2.24 per pound for the nine months ended March 31, 2016. Revenue and the corresponding production attributable to our stream and royalty interests for the nine months ended March 31, 2017 compared to the nine months ended March 31, 2016 is as follows:
Revenue and Reported Production Subject to Our Royalty and Stream Interests
Nine months ended March 31, 2017 and 2016
(In thousands, except reported production ozs. and lbs.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
|
|
|
March 31, 2017
|
|
March 31, 2016
|
|
|
|
|
|
|
|
Reported
|
|
|
|
|
Reported
|
Stream/Royalty
|
|
Metal(s)
|
|
Revenue
|
|
Production
(1)
|
|
Revenue
|
|
Production
(1)
|
Stream
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mount Milligan
|
|
Gold
|
|
$
|
105,161
|
|
83,500
|
oz.
|
|
$
|
95,564
|
|
85,100
|
oz.
|
Pueblo Viejo
(3)
|
|
|
|
$
|
71,911
|
|
|
|
|
$
|
23,008
|
|
|
|
|
|
Gold
|
|
|
|
|
40,200
|
oz.
|
|
|
|
|
20,600
|
oz.
|
|
|
Silver
|
|
|
|
|
1.2
|
Moz.
|
|
|
|
|
N/A
|
|
Andacollo
|
|
Gold
|
|
$
|
41,552
|
|
32,900
|
oz.
|
|
$
|
32,163
|
|
28,200
|
oz.
|
Wassa and Prestea
|
|
Gold
|
|
$
|
17,484
|
|
14,000
|
oz.
|
|
$
|
17,555
|
|
15,500
|
oz.
|
Other
(4)
|
|
Gold
|
|
$
|
|
|
N/A
|
|
|
$
|
317
|
|
200
|
oz.
|
Total stream revenue
|
|
|
|
$
|
236,108
|
|
|
|
|
$
|
168,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peñasquito
|
|
|
|
$
|
19,935
|
|
|
|
|
$
|
20,208
|
|
|
|
|
|
Gold
|
|
|
|
|
423,000
|
oz.
|
|
|
|
|
542,100
|
oz.
|
|
|
Silver
|
|
|
|
|
15.1
|
Moz.
|
|
|
|
|
18.8
|
Moz.
|
|
|
Lead
|
|
|
|
|
97.8
|
Mlbs.
|
|
|
|
|
120.9
|
Mlbs.
|
|
|
Zinc
|
|
|
|
|
232.1
|
Mlbs.
|
|
|
|
|
289.8
|
Mlbs.
|
Cortez
|
|
Gold
|
|
$
|
4,942
|
|
47,600
|
oz.
|
|
$
|
4,840
|
|
58,000
|
oz.
|
Other
(4)
|
|
Various
|
|
$
|
70,895
|
|
N/A
|
|
|
$
|
72,005
|
|
N/A
|
|
Total royalty revenue
|
|
|
|
$
|
95,772
|
|
|
|
|
$
|
97,053
|
|
|
|
Total Revenue
|
|
$
|
331,880
|
|
|
|
|
$
|
265,660
|
|
|
|
|
(1)
|
|
Reported production relates to the amount of metal sales, subject to our royalty and stream interests, for the nine months ended March 31, 2017 and 2016, and may differ from the operators’ public reporting.
|
|
(2)
|
|
Refer to “Recent Business Developments” and “Property Developments” above for further discussion on our principal stream interests.
|
|
(3)
|
|
The gold and silver streams at Pueblo Viejo were acquired during the three months ended September 30, 2015. The first gold and silver stream deliveries were in December 2015 and March 2016, respectively.
|
|
(4)
|
|
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, 2017, compared with the nine months ended March 31, 2016, resulted primarily from an increase in our stream revenue and an increase in the average gold and silver prices. The increase in our stream revenue was primarily attributable to increased gold production at our Pueblo Viejo and Andacollo gold streams and new silver production from our Pueblo Viejo silver stream. Our first silver stream delivery from Pueblo Viejo was in March 2016, and the first revenue from Pueblo Viejo silver sales was recognized in the June 2016 quarter .
Gold and silver ounces purchased and sold during the nine months ended March 31, 2017 and 2016, gold and silver ounces in inventory as of March 31, 2017, and June 30, 2016, for our streaming interests were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
As of
|
|
As of
|
|
|
March 31, 2017
|
|
March 31, 2016
|
|
March 31, 2017
|
|
June 30, 2016
|
Gold Stream
|
|
Purchases (oz.)
|
|
Sales (oz.)
|
|
Purchases (oz.)
|
|
Sales (oz.)
|
|
Inventory (oz.)
|
|
Inventory (oz.)
|
Mount Milligan
|
|
76,100
|
|
83,500
|
|
79,800
|
|
85,100
|
|
-
|
|
7,500
|
Pueblo Viejo
|
|
39,700
|
|
40,200
|
|
31,200
|
|
20,600
|
|
10,500
|
|
11,000
|
Andacollo
|
|
35,400
|
|
32,900
|
|
28,200
|
|
28,200
|
|
2,500
|
|
-
|
Wassa and Prestea
|
|
14,500
|
|
14,000
|
|
17,100
|
|
15,500
|
|
1,900
|
|
1,300
|
Phoenix Gold
|
|
-
|
|
-
|
|
300
|
|
200
|
|
-
|
|
-
|
Total
|
|
165,700
|
|
170,600
|
|
156,600
|
|
149,600
|
|
14,900
|
|
19,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
As of
|
|
As of
|
|
|
March 31, 2017
|
|
March 31, 2016
|
|
March 31, 2017
|
|
June 30, 2016
|
Silver Stream
|
|
Purchases (Moz.)
|
|
Sales (Moz.)
|
|
Purchases (oz.)
|
|
Sales (oz.)
|
|
Inventory (oz.)
|
|
Inventory (oz.)
|
Pueblo Viejo
|
|
1.2
|
|
1.2
|
|
209,800
|
|
-
|
|
375,000
|
|
323,700
|
Cost of sales were approximately $67.6 million for the nine months ended March 31, 2017, compared to $52.0 million for the nine months ended March 31, 2016. The increase is primarily attributable to an increase in gold production and new silver stream production at Pueblo Viejo, which resulted in additional cost of sales of approximately $14.9 million. Cost of sales is specific to our stream agreements and is the result of RGLD Gold’s purchase of gold and silver for a cash payment. The cash payment for 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 or silver spot price near the date of metal delivery.
Exploration costs increased to $8.4 million for the nine months ended March 31, 2017, from $6.1 million for the nine months ended March 31, 2016. Exploration costs are specific to our Peak Gold joint venture 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 2016 10-K.
Depreciation, depletion and amortization increased to $119.8 million for the nine months ended March 31, 2017, from $105.7 million for the nine months ended March 31, 2016. The increase was primarily attributable to increased gold sales and new silver sales from our gold and silver streams at Pueblo Viejo, which resulted in additional depletion of approximately $22.0 million during the current period. This increase was partially offset by a decrease in depletion expense on our Voisey’s Bay royalty of approximately $9.5 million, due to the ongoing dispute related to the calculation of the NSR royalty (see Note 11 of our notes to consolidated financial statements).
Interest and other income increased to $10.1 million for the nine months ended March 31, 2017, from $2.8 million for the nine months ended March 31, 2016. The increase was primarily due to a gain recognized on consideration received as part of the termination of our Phoenix Gold Project streaming interest. In exchange for the termination of the Phoenix Gold Project streaming interest, the Company received approximately three million common shares of Rubicon Minerals Corporation (“Rubicon”), the operator of the Phoenix Gold Project. The fair value of the Rubicon common shares, and corresponding gain, received upon exchange was approximately $3.4 million. The increase 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 $2.6 million.
During the nine months ended March 31, 2017, we recognized income tax expense totaling $18.7 million compared with $55.7 million during the nine months ended March 31, 2016. This resulted in an effective tax rate of 19.9% in the current
period, compared with 124.0% during the nine months ended March 31, 2016. The decrease in the effective tax rate for the nine months ended March 31, 2017 is primarily related to the discrete tax impacts attributable to the Company’s Andacollo transactions and the liquidation of our Chilean subsidiary during the three months ended September 30, 2015.
Liquidity and Capital Resources
Overview
At March 31, 2017, we had current assets of $134.2 million compared to current liabilities of $24.8 million resulting in working capital of $109.4 million and a current ratio of 5 to 1. This compares to current assets of $164.8 million and current liabilities of $22.7 million at June 30, 2016, resulting in working capital of $142.1 million and a current ratio of approximately 7 to 1. The decrease in our current ratio was primarily attributable to a decrease in our cash and equivalents primarily due to the $45.0 million repayment on our outstanding borrowings under the revolving credit facility during the current period. Please refer to “Summary of Cash Flows” below for further discussion on changes to our cash and equivalents during the period.
During the quarter ended March 31, 2017, liquidity needs were met from $84.6 million in net revenue and our available cash resources. The $70 million acquisition of additional royalty interests at Cortez, as discussed above, was funded from our revolving credit facility during the quarter ended September 30, 2016.
As of March 31, 2017, the Company had $350 million available and $300 million outstanding under its revolving credit facility. During the three months ended March 31, 2017, the Company repaid $45.0 million of the outstanding borrowings under the revolving credit facility. Working capital, combined with the Company’s undrawn revolving credit facility, resulted in approximately $459.4 million of total available liquidity at March 31, 2017. The Company was in compliance with each financial covenant as of March 31, 2017. Refer to Note 4 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, including the remaining conditional funding incurred in connection with the Ilovica stream acquisition and the Peak Gold joint venture. 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 2016 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 $200.9 million for the nine months ended March 31, 2017, compared to $120.7 million for the nine months ended March 31, 2016. The increase was primarily due to an increase in proceeds received from our stream and royalty interests, net of production taxes and cost of sales, of approximately $49.3 million. The increase was also due to a decrease in income taxes paid of approximately $35.6 million, which resulted from $47.7 million of cash taxes paid for the termination of the Andacollo royalty during the prior year period, partially offset by $9.7 million of cash taxes paid to taxing authorities, as a condition for appealing an assessment, during the current period.
Investing Activities
Net cash used in investing activities totaled $202.2 million for the nine months ended March 31, 2017, compared to cash used in investing activities of $1.0 billion for the nine months ended March 31, 2016. 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 (primarily the Pueblo Viejo and Andacollo stream acquisitions). Refer to “Recent Business Developments” above for further discussion on our recently acquired royalty interests.
Financing Activities
Net cash used in financing activities totaled $27.2 million for the nine months ended March 31, 2017, compared to cash provided by financing activities of $254.0 million for the nine months ended March 31, 2016. The decrease in cash provided by financing activities is primarily due to the Company’s $350 million borrowing under its revolving credit facility to fund stream acquisitions during the prior year period. During the three months ended March 31, 2017, the Company repaid $45.0 million of the outstanding borrowings under the 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 2016 10-K for discussion on our critical accounting policies.
Forward-Looking Statements
Cautionary “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995: With the exception of historical matters, the matters discussed in this Quarterly Report on Form 10-Q are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from projections or estimates contained herein. Such forward-looking statements include, without limitation, statements regarding projected production estimates and estimates pertaining to timing and commencement of production from the operators of properties where we hold stream and royalty interests; statements related to ongoing developments and expected developments at properties where we hold stream and royalty interests; effective tax rate estimates; 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:
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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;
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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;
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the ability of operators to bring projects, particularly development stage properties, into production on schedule or operate in accordance with feasibility studies;
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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;
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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;
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liquidity or other problems our operators may encounter, including shortfalls in the financing required to complete construction and bring a mine into production;
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decisions and activities of the operators of properties where we hold stream and royalty interests;
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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 floods or earthquakes and access to raw materials, water and power;
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changes in operators’ mining, processing and treatment techniques, which may change the production of minerals subject to our stream and royalty interests;
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changes in the methodology employed by our operators to calculate our stream and royalty interests in accordance with the agreements that govern them;
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changes in project parameters as plans of the operators of properties where we hold stream and royalty interests are refined;
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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 to the properties where we hold stream and royalty interests;
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adverse effects on market demand for commodities, the availability of financing, and other effects from adverse economic and market conditions;
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future financial needs of the Company and the operators of properties where we hold stream or royalty interests;
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federal, state and foreign legislation governing us or the operators of properties where we hold stream and royalty interests;
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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;
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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;
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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 exploration 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;
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changes in laws governing us, the properties where we hold stream and royalty interests or the operators of such properties;
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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;
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changes in management and key employees; and
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failure to complete future acquisitions or the failure of transactions involving the operators to close;
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as well as other factors described elsewhere in this report and our other reports filed with the SEC, including our Fiscal 2016 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.