ROYAL GOLD, INC. 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, 2019 filed
with the Securities and Exchange Commission (the "SEC") on August 8, 2019
(Fiscal 2019 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 2019 10-K.
Statement Regarding Third Party Information
Royal Gold does not own, develop, or mine the properties on which it holds stream or royalty interests, except for our interest in thePeak Gold, LLC joint venture ("Peak Gold JV") as described further in our Fiscal 2019 10-K. Certain information provided in this report, including the Operator's Production Estimates by Stream and Royalty Interest for Calendar 2019 and Property Developments, has been provided to us by the operators of properties where we own interests or is publicly available information filed by these operators with applicable securities regulatory bodies, including theSEC .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. OverviewRoyal Gold , together with its subsidiaries, is engaged in the business of acquiring and managing metal streams, royalties, and similar interests. We seek to acquire existing stream and royalty interests or to finance projects that are in production or in the development stage in exchange for stream or royalty interests.
We manage our business under two segments:
Acquisition and Management of Stream Interests - A metal stream is a purchase agreement that provides, in exchange for an upfront deposit payment, the right to purchase all or a portion of one or more metals produced from a mine, at a price determined for the life of the transaction by the purchase agreement.
As
ofDecember 31, 2019 , we owned seven stream interests, which are on six producing properties and two development stage properties. Stream interests accounted for approximately 72% and 69% of our total revenue for the three and six months endedDecember 31, 2019 and 2018, respectively. 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 ofDecember 31, 2019 , we owned royalty interests on 37 producing properties, 13 development stage properties and 129 exploration stage properties, of which we consider 47 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 31% of our total revenue for the three and six months endedDecember 31, 2019 and 2018, respectively. We do not conduct mining operations on the properties in which we hold stream and royalty interests, and except for our interest in the Peak Gold JV, we generally are not required to contribute to capital costs, exploration costs, environmental costs or other operating costs on those properties. 20 Table of Contents 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 and royalties 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, our analysis of technical, financial, legal and other confidential information of particular opportunities, submission of indications of interest and term sheets, participation in preliminary discussions and negotiations and involvement as a bidder in competitive processes. Our financial results are primarily tied to the price of gold and, to a lesser extent, the price of silver and copper, together with the amounts of production from our producing stage stream and royalty interests. The price of gold, silver, copper and other metals has fluctuated widely in recent years. The marketability and the price of metals are influenced by numerous factors beyond the control of the Company and significant declines in the price of gold, silver or copper could have a material and adverse effect on the Company's results of operations and financial condition.
For the three and six months ended
Three Months Ended Six Months Ended
December 31, 2019 December 31, 2018
Average Percentage Average Percentage Average Percentage Average Percentage
Metal Price of Revenue Price of Revenue Price of Revenue Price of Revenue
Gold ($/ounce) $ 1,481 74% $ 1,226 75% $ 1,477 76% $ 1,220 76%
Silver ($/ounce) $ 17.32 10% $ 14.54 10% $ 17.15 9% $ 14.78 10%
Copper ($/pound) $ 2.67 13% $ 2.80 11% $ 2.65 10% $ 2.78 8%
Other N/A 3% N/A 4% N/A 5% N/A 6%
Recent Business Developments
Leadership changes
As previously announced, we recently made several key leadership changes as a result of our ongoing management succession planning. After a thorough search process, our Board of Directors appointedWilliam Heissenbuttel as our President and Chief Executive Officer and a member of the Board of Directors, effectiveJanuary 2, 2020 .Mr. Heissenbuttel most recently served as our Chief Financial Officer and Vice President Strategy. In addition, the Board of Directors promoted the following executives effectiveJanuary 2, 2020 :Mark Isto , Executive Vice President and Chief Operating Officer;Paul Libner , Chief Financial Officer and Treasurer; andRandy Shefman , Vice President and General Counsel. Alturas royalty acquisition
OnJanuary 29, 2020 , a wholly-owned subsidiary of the Company entered into an agreement with various private individuals for the acquisition of a net smelter return ("NSR") royalty of up to 1.06% (gold) and up to 1.59% (copper) on mining concessions as part of the Alturas project, which is located within theCoquimbo Region ofChile and held by a subsidiary of Barrick Gold Corporation ("Barrick"), Compañia Minera Salitrales Limitada ("CMSL"). Total consideration for the royalty is up to$41 million , of which$11 million was paid onJanuary 29, 2020 . A future payment of up to$20 million is conditional based on a project construction decision by Barrick and the size of the minable mineralized material on the date of the construction decision. A further future payment of$10 million will be made to the private individuals upon first production from the mining concessions.
InAugust 2019 , a subsidiary of the Company entered into an agreement with TriStar Gold Inc. and its subsidiaries (together "TriStar") to acquire (i) up to a 1.5% NSR royalty on the Castelo de Sonhos gold project ("CDS"), located inBrazil , and (ii) warrants to purchase up to 19,640,000 common shares of TriStar. Total consideration is$7.5 million and is payable over three payments, of which$4.5 million was paid inAugust 2019 and$1.5 million was paid inNovember 2019 . The final payment of$1.5 million is subject to satisfaction of certain conditions and is payable byMarch 31, 2020 . The NSR 21
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royalty is incrementally earned pro-rata with the funding schedule while the warrants to purchase TriStar common shares will be issued pro-rata with the funding schedule.
Aggregate funds invested by the Company will be used by TriStar primarily to advance CDS to the feasibility stage, including advancing permitting activities.
A Preliminary Economic Assessment for CDS was prepared by TriStar in calendar 2018 and was based on a total of 2.0 million ounces of mineralized material at an average grade of approximately 1.0 gram per tonne. Refer to Note 2 of our notes to consolidated financial statements for further discussion.
Principal Stream and Royalty Interests
The Company considers both historical and future potential revenues in determining which stream and royalty interests in our portfolio are principal to our business. Estimated future potential revenues from both producing and development properties are based on a number of factors, including reserves subject to our stream and royalty interests, production estimates, feasibility studies, metal price assumptions, mine life, legal status and other factors and assumptions, any of which could change and could cause the Company to conclude that one or more of such stream and royalty interests are no longer principal to our business. Currently, our principal producing stream and royalty interests are listed alphabetically in the following table.
Please refer to our Fiscal 2019 10-K for further discussion of our principal producing stream and royalty interests.
Stream or royalty
interests
(Gold unless otherwise
Mine Location Operator stated)
Andacollo Region IV, Compañía Minera Teck Gold stream - 100% of
Chile Carmen de Andacollo gold produced (until
("Teck") 900,000 ounces
delivered; 50%
thereafter)
Cortez Nevada, USA Nevada Gold Mines GSR1: 0.40% to 5.0%
LLC ("NGM"), a joint sliding-scale GSR
venture between GSR2: 0.40% to 5.0%
Barrick and Newmont sliding-scale GSR
Corp. ("Newmont") GSR3: 0.71% GSR NVR1:
4.91% NVR; 4.52% NVR
(Crossroads)
Mount Milligan British Centerra Gold Inc. Gold stream - 35.00%
Columbia, ("Centerra") of payable gold
Canada
Copper stream - 18.75%
of payable copper
Peñasquito Zacatecas, Newmont 2.0% NSR (gold,
Mexico silver, lead, zinc)
Pueblo Viejo Sanchez Barrick (60%) Gold stream - 7.5% of
Ramirez, gold produced (until
Dominican 990,000 ounces
Republic delivered; 3.75%
thereafter)
Silver stream - 75% of
silver produced (until
50.0 million ounces
delivered; 37.5%
thereafter)
Rainy River Ontario, Canada New Gold, Inc. ("New Gold stream - 6.5% of
Gold") gold produced (until
230,000 ounces
delivered; 3.25%
thereafter)
Silver stream - 60% of
silver produced (until
3.1 million ounces
delivered; 30%
thereafter)
Wassa Western Region Golden Star Gold stream - 10.5% of
of Ghana Resources Ltd. gold produced (until
("Golden Star") 240,000 ounces
delivered; 5.5%
thereafter)(1)
(1) The 240,000 ounce threshold includes production from Golden Star's Prestea
mine.
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Operators' Production Estimates by Stream and Royalty Interest for Calendar 2019
We generally receive annual production estimates from many of the operators of our producing mines during the first quarter of each calendar year. In some instances, an operator may revise their original calendar year guidance throughout the year. The following table shows current production estimates for our principal producing properties for calendar 2019 as well as the actual production reported to us by the various operators throughDecember 31, 2019 . The estimates and production reports are prepared by the operators of the mining properties. We do not participate in the preparation or calculation of the operators' estimates or production reports and have not independently assessed or verified, and disclaim all responsibility for, the accuracy of such information. Please refer to "Property Developments" below within this MD&A for further discussion on our principal producing and development stage properties. Operators' Estimated and Actual Production by Stream and Royalty Interest for Calendar 2019 Principal Producing Properties Calendar 2019 Operator's Production Calendar 2019 Operator's Production Estimate(1) Actual(2) Gold Silver Base Metals Gold Silver Base Metals Stream/Royalty (oz.) (oz.) (lbs.) (oz.) (oz.) (lbs.) Stream: Andacollo(3) 62,000 46,800 Mount Milligan(4) 155,000 - 175,000 137,100 Copper 65 - 75 million 53.1 million Pueblo Viejo(5) 550,000 - 600,000 N/A 590,000 N/A Rainy River(6) 245,000 - 270,000 245,000 - 270,000 253,800 282,100 Wassa(7) 150,000 - 160,000 156,000 Royalty: Cortez GSR1 115,500 91,400 Cortez GSR2 70,200 41,200 Cortez GSR3 183,700 131,600 Cortez NVR1 156,900 116,200
Cortez NVR (Crossroads) 2,000
1,100
Peñasquito(8) 165,000 25 million 71,000 9.2 million
Lead 180 million 63 million
Zinc 245 million 108 million
(1) Production estimates received from our operators are for calendar 2019,
unless otherwise noted in footnotes to this table. Please refer to our
cautionary statement regarding third party information at the beginning of
this MD&A. There can be no assurance that production estimates received from
our operators will be achieved. Please also refer to our cautionary language
regarding forward-looking statements following this MD&A, as well as the Risk
Factors identified in Part I, Item 1A, of our Fiscal 2019 10-K for
information regarding factors that could affect actual results.
(2) Actual production figures shown are from our operators and cover the period
January 1, 2019 throughDecember 31, 2019 , unless otherwise noted in footnotes to this table.
(3) The estimated and actual production figures shown for Andacollo are contained
gold in concentrate.
(4) The estimated and actual production figures shown for
payable gold and copper in concentrate. Actual production shown is for the
nine months ended
not available from the operator as of the date of this report.
(5) The estimated and actual production figures shown for
payable gold in doré and represent Barrick's 60% interest in
The operator did not provide estimated or actual silver production.
(6) The estimated and actual production figures shown for
produced gold and silver in doré.
(7) The estimated and actual production figures shown for Wassa are payable gold
in doré.
(8) The estimated and actual gold and silver production figures shown for
Peñasquito are payable gold and silver in concentrate and doré. The
estimated lead and zinc production figures shown are payable lead and zinc in
concentrate. The estimated production figures shown are for the period April
18, 2019 through December 31, 2019 , while actual production figures shown are
for the
23
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period
calendar year 2019 information was not available from the operator as of the
date of this report. Property Developments
The following property development information is provided by the operators of
the properties, either to
Stream Interests Andacollo Gold stream deliveries from Andacollo were approximately 18,600 ounces of gold for the three months endedDecember 31, 2019 , compared to approximately 10,700 ounces of gold for the three months endedDecember 31, 2018 . Increased deliveries resulted from differences in the timing of shipments and settlements during the periods. OnOctober 13, 2019 , Teck reported the Teck Carmen de Andacollo Workers Union gave notice that a strike would commence onOctober 14, 2019 . Operations were suspended with the exception of essential activities required to maintain safety and the environment. OnDecember 5, 2019 , Teck reported theWorkers Union ratified a new 36-month collective agreement and operations had resumed. We anticipate the impact of the strike to be reflected in our financial results beginning with the quarter endedJune 30, 2020 , as we generally receive gold deliveries from Andacollo within six months of concentrate shipment.
According toKhoemacau Copper Mining (Pty.) Limited ("KCM"), progress continued at theKhoemacau Project ("Khoemacau") inBotswana . According to KCM, the project reached approximately 26% of construction completion at the end of theDecember 2019 quarter with 77% of the capital committed. Also, according to KCM, there are approximately 1,400 workers currently on site, with activities focused on completing excavation of the boxcuts, construction of accommodation, power and water infrastructure at Zone 5, completing construction of the access road between Zone 5 and the Boseto mill, and refurbishment of the Boseto mill. The mining contractor has been mobilized and much of the underground mining fleet has arrived on site and is being commissioned, with handover of the first boxcut from KCM to the contractor scheduled to begin in earlyFebruary 2020 , which is delayed from previous estimates due to a slower than planned excavation advance, partially caused by excess surface water accumulation in the boxcuts during
the current rainy season.Royal Gold has made two advance payments under the Khoemacau stream agreement:$65.8 million onNovember 5, 2020 , and$22 million onFebruary 5, 2020 .Royal Gold's remaining commitment ranges from$124.2 million for the base stream of 80% of payable silver up to$177.2 million should KCM elect to increase the stream from 80% to 100% of payable silver. Further payments are subject to certain conditions and are scheduled to be made on a quarterly basis using an agreed formula and certification process as project spending progresses.
KCM continues to expect the first shipment of concentrate by mid-calendar 2021.
Mount Milligan Gold stream deliveries fromMount Milligan were approximately 18,800 ounces of gold for the three months endedDecember 31, 2019 , compared to approximately 10,300 ounces of gold for the three months endedDecember 31, 2018 . Increased deliveries resulted from differences in the timing of shipments.
Copper stream deliveries from
OnOctober 30, 2019 , Centerra reported it is preparing an updated 43-101 technical report on theMount Milligan mine that will incorporate changes to long-term gold recoveries, operating costs, optimization studies and exploration drilling. The expected timing for publication of this report is within the coming months. Centerra expects a material reduction in the mineral reserves and mineralized material atMount Milligan , although it has acknowledged that the extent of any 24 Table of Contents
changes in reserves and mineralized material cannot be precisely determined until all relevant studies and modeling have been completed.
A significant reduction in reserves and mineralized material could be an indicator of potential impairment forRoyal Gold's stream interest. The financial impairment taken by Centerra does not impact the mine operating performance, and, further, a significant reduction in reserves and mineralized material atMount Milligan may not result in an impairment given current high gold prices and our low depletion rates ($402 per ounce of gold and$0.81 per pound of copper) for theMount Milligan stream interest. It is unclear at this point what impact, if any, the results of Centerra's updated 43-101 technical report will have on the carrying value of our stream interest atMount Milligan .
The Company will continue to monitor these developments at
Pueblo Viejo Gold stream deliveries fromPueblo Viejo were approximately 13,200 ounces of gold for the three months endedDecember 31, 2019 , compared to approximately 10,400 ounces of gold for the three months endedDecember 31, 2018 . Lower deliveries in theDecember 2018 quarter were due to a change from deliveries based on provisional assays from the refinery to final assays. Silver stream deliveries were approximately 417,700 ounces of silver for the three months endedDecember 31, 2019 , compared to approximately 469,000 ounces of silver for the three months endedDecember 31, 2018 . Lower deliveries were primarily the result of lower silver grades during the current quarter. Barrick has been advancing a plant expansion pre-feasibility study atPueblo Viejo , including a fatal flaw analysis for additional tailings capacity, and targeted completion of the study for the end of calendar 2019. If positive, a feasibility study of the expansion is expected to be completed during calendar 2020. Barrick expects the plant expansion project could significantly increase throughput and allow the mine to maintain average annual gold production of approximately 800,000 ounces after calendar 2022 (on a 100% basis).Rainy River
Gold stream deliveries fromRainy River were approximately 4,200 ounces of gold for the three months endedDecember 31, 2019 , compared to approximately 4,500 ounces of gold for the three months endedDecember 31, 2018 .
Silver stream deliveries were approximately 48,100 ounces of silver for the
three months ended
New Gold reported total gold production of 51,000 ounces for the current quarter and average mill throughput of approximately 22,500 tonnes per day for theDecember 2019 quarter, including average throughput of approximately 24,800 tonnes per day for November andDecember 2019 , exceeding the target range of 24,000 tonnes per day and original design of 21,000 tonnes per day. New Gold also reported that mill availability averaged 89% for the current quarter and gold recovery averaged 91%, in line with plan. During the quarter endedDecember 31, 2019 , New Gold reported that it continued to advance a comprehensive mine optimization study that includes a review of alternative open pit and underground mining scenarios, and it expects to release the results of this study onFebruary 13, 2020 . A significant reduction in reserves and mineralized material could be an indicator of potential impairment forRoyal Gold's stream interest. It is unclear at this point what impact, if any, the results of New Gold's optimization study and any updates to the reserves and mineralized material atRainy River will have on the carrying value of our stream interest. As ofDecember 31, 2019 , the Company's depletion rate for its interest atRainy River was$591 per ounce of gold and$6.34 per ounce of silver production. The Company will continue to monitor these developments. Wassa Gold stream deliveries from Wassa were approximately 4,900 ounces of gold for the three months endedDecember 31, 2019 , compared to approximately 3,600 ounces of gold for the three months endedDecember 31, 2018 . The improvement in deliveries is related to improved gold grades. Wassa delivered grades of 3.78 grams per tonne during the current quarter, 25
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which was 33% higher than the
OnNovember 13, 2019 ,Golden Star reported that it continues to intersect significant higher grade gold mineralization from infill and step out surface drilling on the southern extensions of the Wassa deposit. A better understanding of the mineralization at depth resulting from this drilling will be incorporated into the ongoing geological interpretation update that will be the basis forGolden Star's calendar 2019 year-end mineralized material estimation. For calendar 2020,Golden Star expects Wassa to produce between 155,000 and 165,000 ounces, compared to 156,000 gold ounces for calendar 2019.Golden Star expects mining rates to average in excess of 4,000 tonnes per day, as a result of the ongoing development and definition drilling and additional mining fleet. Royalty Interests Cortez Production attributable to our royalty interest at Cortez increased to 28,000 ounces of gold for the three months endedDecember 31, 2019 compared to 19,900 ounces of gold for the three months endedDecember 31, 2018 . The increase was a result of production ramping up at the Crossroads deposit, which is subject to our NVR1C, GSR2 and portions of our NVR1 and GSR3 royalty interests.
Barrick reported that Crossroads transitioned from pre-production in the
Peñasquito
Gold, silver and lead production attributable to our royalty interest at Peñasquito increased approximately 79%, 85% and 71%, respectively, while zinc production decreased approximately 13% when compared to the prior year quarter.
Royalty revenue for the quarter was impacted by a shutdown of mine operations resulting from a blockade of the mine by a trucking contractor and members of theSan Juan deCedros community (one of 25 neighboring communities) that started onSeptember 14, 2019 . Newmont reported that the blockade of the Peñasquito mine was lifted onOctober 8, 2019 , with concentrate shipments resuming immediately thereafter. Newmont further reported that Peñasquito returned to full operations after a 10-day restart process, which commenced onOctober 22, 2019 . OnDecember 13, 2019 , Newmont also announced that the Peñasquito mine and theSan Juan deCedros community had agreed to a 30-year infrastructure solution securing sustainable water availability for the community's domestic and agricultural uses, which represents a significant milestone and an important step in the ongoing negotiations between the parties. For calendar 2020, Newmont expects a full year of operations at Peñasquito with higher grades, leading to production of an estimated 575,000 ounces of gold, 30 million ounces of silver, 425 million pounds of zinc and 200 million pounds
of lead. Results of Operations
Quarter Ended
For the quarter endedDecember 31, 2019 , we recorded net income and comprehensive income attributable toRoyal Gold stockholders of$41.3 million , or$0.63 per basic and diluted share, as compared to net income and comprehensive income attributable toRoyal Gold stockholders of$23.6 million , or$0.36 per basic and diluted share, for the quarter endedDecember 31, 2018 .
The increase in our earnings per share was primarily attributable to an increase in revenue and a decrease in our interest expense, each discussed further below.
For the quarter endedDecember 31, 2019 , we recognized total revenue of$123.6 million , which is comprised of stream revenue of$89.6 million and royalty revenue of$34.0 million at an average gold price of$1,481 per ounce, an average silver price of$17.32 per ounce and an average copper price of$2.67 per pound. This is compared to total revenue of 26
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$97.6 million for the three months endedDecember 31, 2018 , which was comprised of stream revenue of$67.7 million and royalty revenue of$29.9 million , at an average gold price of$1,226 per ounce, an average silver price of$14.54 per ounce and an average copper price of$2.80 per pound. Revenue and the corresponding production attributable to our stream and royalty interests for the quarter endedDecember 31, 2019 compared to the quarter endedDecember 31, 2018 are as follows:
Revenue and Reported Production Subject to Our Stream and Royalty Interests
Quarter Ended December 31, 2019 and 2018
(Amounts in thousands, except reported production ozs. and lbs.)
Three Months Ended Three Months Ended
December 31, 2019 December 31, 2018
Reported Reported
Stream/Royalty Metal(s) Revenue Production(1) Revenue Production(1)
Stream(2):
Mount Milligan $ 30,629 $ 28,169
Gold 12,900 oz. 17,700 oz.
Copper 4.3 Mlbs. 2.4 Mlbs.
Pueblo Viejo $ 23,614 $ 18,230
Gold 10,500 oz. 8,900 oz.
Silver 462,400 oz. 509,500 oz.
Andacollo Gold $ 20,665 13,900 oz. $ 7,635 6,200 oz.
Rainy River $ 7,562 $ 4,095
Gold 4,500 oz. 2,900 oz.
Silver 51,100 oz. 36,000 oz.
Wassa Gold $ 4,794 3,300 oz. $ 6,459 5,300 oz.
Other(3) Gold $ 2,361 1,600 oz. $ 3,091 2,500 oz.
Total stream revenue $ 89,625 $ 67,679
Royalty(2):
Peñasquito $ 7,577 $ 4,660
Gold 95,800 oz. 53,400 oz.
Silver 9.3 Moz. 5.0 Moz.
Lead 61.5 Mlbs. 36.1 Mlbs.
Zinc 72.1 Mlbs. 83.1 Mlbs.
Cortez Gold $ 3,292 28,000 oz. $ 2,335 19,900 oz.
Other(3) Various $ 23,149 N/A $ 22,918 N/A
Total royalty revenue $ 34,018 $ 29,913
Total Revenue $ 123,643 $ 97,592 (1) Reported production relates to the amount of metal sales subject to our
stream and royalty interests for the three months ended
2018, and may differ from the operators' public reporting.
(2) Refer to "Property Developments" above for further discussion on our
principal stream and royalty interests.
(3) Individually, no stream or royalty included within the "Other" category for
royalties contributed greater than 5% of our total revenue for either period.
The increase in our total revenue for the three months endedDecember 31, 2019 , compared with the three months endedDecember 31, 2018 , 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 an increase in gold sales at Andacollo,Pueblo Viejo andRainy River and higher copper sales atMount Milligan . These increases were partially offset by lower gold sales atMount Milligan primarily due to timing of deliveries. Please refer to "Property Developments" earlier within this MD&A for further discussion on recent developments regarding properties covered by certain of our stream and royalty interests. 27 Table of Contents Gold and silver ounces and copper pounds purchased and sold during the three months endedDecember 31, 2019 and 2018, and gold and silver ounces and copper pounds in inventory as ofDecember 31, 2019 , andJune 30, 2019 , for our streaming interests were as follows: Three Months Ended Three Months Ended As of As of December 31, 2019 December 31, 2018 December 31, 2019 June 30, 2019 Gold Stream Purchases (oz.) Sales (oz.) Purchases (oz.) Sales (oz.) Inventory (oz.) Inventory (oz.) Mount Milligan 18,800 12,900 10,300 17,700 10,300 7,100 Pueblo Viejo 13,200 10,500 10,400 8,900 13,200 9,500 Andacollo 18,600 13,900 10,700 6,200 4,700 4,300 Wassa 4,900 3,300 3,600 5,300 2,400 1,500 Rainy River 4,200 4,500 4,500 2,900 1,300 1,800 Other 1,400 1,600 1,100 2,600 400 400 Total 61,100 46,700 40,600 43,600 32,300 24,600 Three Months Ended Three Months Ended As of As of December 31, 2019 December 31, 2018 December 31, 2019 June 30, 2019 Silver Stream Purchases (oz.) Sales (oz.) Purchases (oz.) Sales (oz.) Inventory (oz.) Inventory (oz.) Pueblo Viejo 417,700 462,400 469,000 509,500 417,800 475,600 Rainy River 48,100 51,100 41,700 36,000 48,400 36,500 Total 465,800 513,500 510,700 545,500 466,200 512,100 Three Months Ended Three Months Ended As of As of December 31, 2019 December 31, 2018 December 31, 2019 June 30, 2019 Copper Stream Purchases (Mlbs.) Sales (Mlbs.) Purchases (Mlbs.) Sales (Mlbs.) Inventory (Mlbs.) Inventory (Mlbs.) Mount Milligan 4.4 4.3 2.5 2.4 0.9 0.8 Cost of sales, which excludes depreciation, depletion and amortization, increased to$21.1 million for the three months endedDecember 31, 2019 from$18.2 million for the three months endedDecember 31, 2018 . The increase was primarily due to increased gold sales at Andacollo and increased gold and silver prices when compared to the prior year quarter. Cost of sales is specific to our stream agreements and is the result ofRGLD Gold AG's purchase of gold, silver and copper for a cash payment. The cash payment for gold from Mount Milligan is the lesser of$435 per ounce or the prevailing market price of gold when purchased, while the cash payment for our other streams is a set contractual percentage of the gold, silver or copper (Mount Milligan ) spot price near the date of metal delivery. Interest and other expense decreased to$2.2 million for the three months endedDecember 31, 2019 , from$7.4 million for the three months endedDecember 31, 2018 . The decrease was primarily attributable to lower interest expense as a result of a decrease in average debt amounts outstanding when compared to the prior period. As discussed in our Fiscal 2019 10-K, the Company settled the$370 million aggregate principal amount due under its convertible senior notes that matured inJune 2019 . Refer to Note 5 of our notes to consolidated financial statements for further discussion on our outstanding debt. During the three months endedDecember 31, 2019 , we recognized an income tax expense totaling$11.1 million , compared with an income tax benefit of$2.1 million during the three months endedDecember 31, 2018 . The income tax expense resulted in an effective tax rate of 21.6% in the current period, compared with (10.3%) in the quarter endedDecember 31, 2018 . The three months endedDecember 31, 2019 reflected the impacts of additional tax benefits resulting from Swiss Tax Reform. The lower effective tax rate for the three months endedDecember 31, 2018 was primarily attributable to the Company's updated analysis of the tax impacts of the Tax Cuts and Jobs Act (the "Act"), considering newU.S. Treasury regulations andIRS guidance released during the period.
Six Months Ended
For the six months endedDecember 31, 2019 , we recorded net income and comprehensive income attributable toRoyal Gold stockholders of$111.8 million , or$1.70 per basic and diluted share, as compared to net income and comprehensive income attributable toRoyal Gold stockholders of$38.6 million , or$0.59 per basic and diluted share, for the six months endedDecember 31, 2018 . The increase in our earnings per share was primarily attributable to (i) an increase in revenue, (ii) a decrease in our interest expense and (iii) discrete income tax benefits recognized, primarily attributable to recent Swiss tax reform during the quarter endedSeptember 30, 2019 . Each are discussed further below. 28 Table of Contents
For the six months endedDecember 31, 2019 , we recognized total revenue of$242.4 million , which is comprised of stream revenue of$176.6 million and royalty revenue of$65.8 million at an average gold price of$1,477 per ounce, an average silver price of$17.15 per ounce and an average copper price of$2.65 per pound. This is compared to total revenue of$197.6 million for the six months endedDecember 31, 2018 , which was comprised of stream revenue of$137.7 million and royalty revenue of$59.9 million , at an average gold price of$1,220 per ounce, an average silver price of$14.78 per ounce and an average copper price of$2.78 per pound. Revenue and the corresponding production attributable to our stream and royalty interests for the six months endedDecember 31, 2019 compared to the six months endedDecember 31, 2018 are as follows:
Revenue and Reported Production Subject to Our Stream and Royalty Interests
Six Months Ended December 31, 2019 and 2018
(Amounts in thousands, except reported production ozs. and lbs.)
Six Months Ended Six Months Ended
December 31, 2019 December 31, 2018
Reported ReportedStream/Royalty Metal(s) Revenue Production(1) Revenue Production(1) Stream(2): Mount Milligan$ 61,126 $ 37,015 Gold 29,500 oz. 23,300 oz. Copper 6.7 Mlbs. 3.2 Mlbs. Pueblo Viejo$ 45,232 $ 37,717 Gold 20,000 oz. 18,100 oz. Silver 938,000 oz. 1.0 Moz. Andacollo Gold$ 41,269 27,900 oz.$ 35,378 28,900 oz. Rainy River$ 14,728 $ 9,995 Gold 9,100 oz. 7,400 oz. Silver 85,600 oz. 67,500 oz. Wassa Gold$ 10,113 6,900 oz.$ 11,784 9,600 oz. Other(3) Gold$ 4,138 2,800 oz.$ 5,827 4,800 oz. Total stream revenue$ 176,606 $ 137,716 Royalty(2): Peñasquito$ 11,997 $ 8,297 Gold 131,300 oz. 103,700 oz. Silver 13.9 Moz. 9.2 Moz. Lead 91.2 Mlbs. 65.9 Mlbs. Zinc 179.2 Mlbs. 147.3 Mlbs. Cortez Gold$ 7,709 63,100 oz.$ 2,939 26,900 oz. Other(3) Various$ 46,105 N/A$ 48,633 N/A Total royalty revenue$ 65,811 $ 59,869 Total revenue$ 242,417 $ 197,585
(1)Reported production relates to the amount of metal sales subject to our
stream and royalty interests for the six months ended
(2)Refer to "Property Developments" above for further discussion on our principal stream and royalty interests.
(3)Individually, no stream or royalty included within the "Other" category contributed greater than 5% of our total revenue for either period.
The increase in our total revenue for the six months endedDecember 31, 2019 , compared with the six months endedDecember 31, 2018 , 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 an increase in gold and copper sales atMount Milligan . These increases were partially offset by lower metal sales at Wassa. 29 Table of Contents
Gold and silver ounces and copper pounds purchased and sold during the six
months ended
Six Months Ended Six Months Ended As of As of
December 31, 2019 December 31, 2018 December 31, 2019 June 30, 2019
Gold Stream Purchases (oz.) Sales (oz.) Purchases (oz.) Sales (oz.) Inventory (oz.) Inventory (oz.)
Mount Milligan 32,800 29,500 23,000 23,300 10,300 7,100
Andacollo 28,300 27,900 26,000 28,900 4,700 4,300
Pueblo Viejo 23,700 20,000 19,300 18,100 13,200 9,500
Wassa 7,800 6,900 7,700 9,600 2,400 1,500
Rainy River 8,600 9,100 8,100 7,400 1,300 1,800
Other 2,800 2,800 3,500 4,700 400 400
Total 104,000 96,200 87,600 92,000 32,300 24,600
Six Months Ended Six Months Ended As of As of
December 31, 2019 December 31, 2018 December 31, 2019 June 30, 2019
Silver Stream Purchases (oz.) Sales (oz.) Purchases (oz.) Sales (oz.) Inventory (oz.) Inventory (oz.)
Pueblo Viejo 880,200 938,000 978,400 1,049,700 417,800 475,600
Rainy River 97,500 85,600 76,900 67,400 48,400 36,500
Total 977,700 1,023,600 1,055,300 1,117,100 466,200 512,100
Six Months Ended Six Months Ended As of As of
December 31, 2019 December 31, 2018 December 31, 2019 June 30, 2019
Copper Stream Purchases (Mlbs.) Sales (Mlbs.) Purchases (Mlbs.) Sales (Mlbs.) Inventory (Mlbs.) Inventory (Mlbs.)
Mount Milligan 6.8 6.7 4.2 3.2 0.9 0.8
Cost of sales increased to $41.2 million for the six months ended
December 31, 2019 from $34.7 million for the six months ended December 31, 2018 .
The increase was primarily due to increased gold and copper sales from Mount
Milligan , higher gold sales from Pueblo Viejo and Rainy River , and an increase
in gold and silver prices over the prior year quarter. Cost of sales is
specific to our stream agreements and is the result of RGLD Gold's purchase of
gold, silver and copper for a cash payment. The cash payment for gold from
Mount Milligan is the lesser of $435 per ounce or the prevailing market price of
gold when purchased, while the cash payment for our other streams is a set
contractual percentage of the gold, silver or copper (Mount Milligan ) spot price
near the date of metal delivery.
Interest and other expense decreased to $5.1 million for the six months ended
December 31, 2019 , from $15.3 million for the six months ended
December 31, 2018 . The decrease was primarily attributable to lower interest
expense as a result of a decrease in average debt amounts outstanding when
compared to the prior period. As discussed in our Fiscal 2019 10-K, the Company
settled the $370 million aggregate principal amount due under its convertible
senior notes that matured in June 2019 . Refer to Note 5 of our notes to
consolidated financial statements for further discussion on our outstanding
debt.
During the six months ended December 31, 2019 , we recognized an income tax
benefit totaling $12.4 million , compared with an income tax expense of $2.0
million during the six months ended December 31, 2018 . This resulted in an
effective tax rate of (12.8%) in the current period, compared with 5.3% during
the six months ended December 31, 2018 . The decrease in the effective tax rate
for the six months ended December 31, 2019 was primarily related to the
remeasurement of certain deferred tax assets and a net step-up in the basis of
tax assets due to the enactment of the Federal Act on Tax Reform and AHV
Financing (Swiss Tax Reform). The effective tax rate for the six months ended
December 31, 2018 included an income tax benefit related to the transition tax
as part of the Act, which was due to consideration of new U.S. Treasury
regulations and IRS guidance released during the period.
Liquidity and Capital Resources
Overview
At
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During the six months ended December 31, 2019 , liquidity needs were met from
$149.5 million in net cash provided by operating activities and our available
cash resources. During the six months ended December 31, 2019 , the Company
repaid $85 million of the outstanding borrowings under the revolving credit
facility. As of December 31, 2019 , the Company had $135 million outstanding and
$865 million available under its revolving credit facility. Working capital,
combined with the Company's undrawn revolving credit facility, resulted in
approximately $1 billion of total liquidity at December 31, 2019 . The Company
was in compliance with each financial covenant under the revolving credit
facility as of December 31, 2019 . Refer to Note 5 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
conditional funding schedule in connection with the Khoemacau silver stream
acquisition. 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 or 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 2019
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 $149.5 million for the six
months ended December 31, 2019 , compared to $103.5 million for the six months
ended December 31, 2018 . The increase is primarily due to an increase in
proceeds received from our stream interests, net of cost of sales, of
approximately $27.1 million and lower income taxes paid of $10.3 million over
the prior period.
Investing Activities
Net cash used in investing activities totaled $68.1 million for the six months
ended December 31, 2019 , compared to net cash used in investing activities of
$3.7 million for the six months ended December 31, 2018 . The increase in cash
used in investing activities is primarily due to an increase in the acquisition
of stream and royalty interests. In November 2019 , the Company made its first
advance payment of $65.8 million as part of the Khoemacau silver stream
acquisition.
Financing Activities
Net cash used in financing activities totaled
The Company repaid
Recently Adopted Accounting Standards and Critical Accounting Policies
Refer to Note 1 of our notes to consolidated financial statements for further
discussion on any recently adopted accounting standards. Refer to our Fiscal
2019 10-K for discussion on our critical accounting policies.
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Forward-Looking Statements
Cautionary "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: With the exception of historical matters, the matters discussed in this Quarterly Report on Form 10-Q are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from projections or estimates contained herein. Such forward-looking statements include, without limitation, statements regarding the impact of recently adopted or issued accounting standards; the expected schedule for making additional payments to complete acquisition of the CDS NSR and warrants to purchase common shares of TriStar; adverse financial conditions experienced by operators of certain producing stream and royalty properties; available water sources, success in groundwater exploration, expectations for production during the first calendar quarter of 2020, and progress of work on life-of-mine water sources, decreasing long-term recoveries and increasing short to medium-term costs, expected results of updated 43-101 technical report and impact of updated 43-101 technical report on the Company's interests atMount Milligan ; insolvency proceedings and potential for write-down of Company's carrying value for certain non-principal producing properties; expected schedule for making advance payments pursuant to the Khoemacau copper-silver project stream agreement and the funding of such payments; remaining conditions for funding under the Ilovica stream agreement; expectations concerning the proportion of total revenue to come from stream and royalty interests; estimates pertaining to timing, commencement and volume of production from the operators of properties where we hold stream and royalty interests and comparisons of estimates to actual production; statements related to ongoing developments and expected developments at properties where we hold stream and royalty interests; anticipated impact to the Company of the suspension and subsequent resumption of operations at Andacollo; progress of construction, capital committed, forecasted budget and estimated timeframe for first shipment of concentrate at Khoemacau, and size of and conditions to the Company's remaining commitment under the Khoemacau stream agreement; mill availability and throughput, ore production, declining grade, recoveries, circuit optimization, commissioning of gravity circuit and mine optimization atRainy River ; decrease in production, lower grades and recoveries, increased mining rate, drilling program and geological interpretations and updated mineral resource estimations at Wassa; expected transition from pre-stripping to production phase stripping at Cortez; dispute, blockade, suspension and resumption of concentrate sales and operations at, and impact to full-year results for, Peñasquito; expected completion of plant expansion prefeasibility study and feasibility study, and expected increase in throughput and production, atPueblo Viejo ; projected tax benefits; fluctuations in the prices for gold, silver, copper, nickel and other metals; stream and royalty revenue estimates and comparisons of estimates to actual revenue; effective tax rate estimates, including the effect of recently enacted tax reforms; the adequacy of financial resources and funds to cover anticipated expenditures for debt service, general and administrative expenses and dividends, as well as costs associated with exploration and business development and capital expenditures; expected delivery dates of gold, silver, copper and other metals; and our expectation that substantially all our revenues will be derived from stream and royalty interests. Words such as "will," "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 past results as well as those expressed or implied by these forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements include, among others:
a low price environment for gold and other metal prices on which our stream and
? royalty interests are paid or a low price environment for the primary metals
mined at properties where we hold stream and royalty interests;
the production at or performance of properties where we hold stream and royalty
? interests, and variation of actual performance from the production estimates
and forecasts made by the operators of these properties;
the ability of operators to bring projects into production on schedule or
? operate in accordance with feasibility studies, including development stage
mining properties, mine and mill expansion projects and other development and
construction projects;
acquisition and maintenance of permits and authorizations, completion of
? construction and commencement and continuation of production at the properties
where we hold stream and royalty interests;
challenges to mining, processing and related permits and licenses, or to
? applications for permits and licenses, by or on behalf of indigenous
populations, non-governmental organizations, local communities, 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;
? decisions and activities of the operators of properties where we hold stream
and royalty interests;
hazards and risks at the properties where we hold stream and royalty interests
that are normally associated with developing and mining properties, including
unanticipated grade, continuity and geological, metallurgical, processing or
? other problems, mine operating and ore processing facility problems, pit wall
or tailings dam failures, industrial accidents, environmental hazards and
natural catastrophes such as drought, floods, hurricanes or earthquakes and
access to sufficient raw materials, water and power;
changes in operators' mining, processing and treatment techniques and changes
? to operators' cost structure, which may change the production of minerals
subject to our stream and royalty interests;
changes in the methodology employed by our operators to calculate our stream
? and royalty interests, or failure to make such calculations in accordance with
the agreements that govern them;
? changes in project parameters as plans of the operators of properties where we
hold stream and royalty interests are refined;
? accuracy of and decreases in estimates of reserves and mineralization by the
operators of properties where we hold stream and royalty interests;
? contests to our stream and royalty interests and title and other defects in the
properties where we hold stream and royalty interests;
? adverse effects on market demand for commodities, the availability of
financing, and other effects from adverse economic and market conditions;
? future financial needs of the Company and the operators of properties where we
hold stream or royalty interests;
? federal, state and foreign legislation governing us or the operators of
properties where we hold stream and royalty interests;
the availability of stream and royalty interests for acquisition or other
? acquisition opportunities and the availability of debt or equity financing
necessary to complete such acquisitions;
our ability to make accurate assumptions regarding the valuation, timing and
? amount of revenue to be derived from our stream and royalty interests when
evaluating acquisitions;
risks associated with conducting business in foreign countries, including
application of foreign laws to contract and other disputes, validity of
security interests, governmental consents for granting interests in exploration
and exploitation licenses, application and enforcement of real estate, mineral
? tenure, contract, safety, environmental and permitting laws, currency
fluctuations, expropriation of property, repatriation of earnings, taxation,
price controls, inflation, import and export regulations, community unrest and
labor disputes, endemic health issues, corruption, enforcement and uncertain
political and economic environments;
? changes in laws governing us, the properties where we hold stream and royalty
interests or the operators of such properties;
risks associated with issuances of additional common stock or incurrence of
? indebtedness in connection with acquisitions or otherwise including risks
associated with the issuance and conversion of convertible notes;
? changes in management and key employees; and
? failure to complete future acquisitions;
as well as other factors described elsewhere in this report and our other reports filed with theSEC , including our Fiscal 2019 10-K and subsequent Quarterly Report on Form 10-Q. 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. 33
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