0001558370-18-008198.txt : 20181101 0001558370-18-008198.hdr.sgml : 20181101 20181031202144 ACCESSION NUMBER: 0001558370-18-008198 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 64 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181101 DATE AS OF CHANGE: 20181031 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROYAL GOLD INC CENTRAL INDEX KEY: 0000085535 STANDARD INDUSTRIAL CLASSIFICATION: MINERAL ROYALTY TRADERS [6795] IRS NUMBER: 840835164 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13357 FILM NUMBER: 181151697 BUSINESS ADDRESS: STREET 1: 1660 WYNKOOP STREET STREET 2: SUITE 1000 CITY: DENVER STATE: CO ZIP: 80202-1132 BUSINESS PHONE: 303-573-1660 MAIL ADDRESS: STREET 1: 1660 WYNKOOP STREET STREET 2: SUITE 1000 CITY: DENVER STATE: CO ZIP: 80202-1132 FORMER COMPANY: FORMER CONFORMED NAME: ROYAL GOLD INC /DE/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: ROYAL RESOURCES CORP DATE OF NAME CHANGE: 19870517 FORMER COMPANY: FORMER CONFORMED NAME: ROYAL RESOURCES EXPLORATION INC DATE OF NAME CHANGE: 19810716 10-Q 1 rgld-20180930x10q.htm 10-Q rgld_Current_Folio_10Q

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q


 

(Mark One)

 

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

 

For the Quarterly Period Ended September 30, 2018

 

or

 

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

 

For the transition period from        to        

 

Commission File Number: 001-13357

 


Royal Gold, Inc.

(Exact Name of Registrant as Specified in Its Charter)


 

Delaware

    

84-0835164

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation)

 

Identification No.)

 

 

 

1660 Wynkoop Street, Suite 1000

 

 

Denver, Colorado

 

80202

(Address of Principal Executive Offices)

 

(Zip Code)

 

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

 

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

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

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

 

 

Large accelerated filer ☒

Accelerated filer 

Non-accelerated filer    

Smaller reporting company 

Emerging growth company 

 

 

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

 

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

 

There were 65,509,128 shares of the Company’s common stock, par value $0.01 per share, outstanding as of October 25, 2018.    

 

 

 

 


 

 

 

INDEX

 

 

 

 

 

PAGE

 

 

 

    

 

PART I 

    

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1. 

 

Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets

 

3

 

 

Consolidated Statements of Operations and Comprehensive Income

 

4

 

 

Consolidated Statements of Cash Flows

 

5

 

 

Notes to Consolidated Financial Statements

 

6

 

 

 

 

 

Item 2. 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

17

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures about Market Risk

 

28

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

29

 

 

 

 

 

PART II 

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

29

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

29

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

29

 

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

 

29

 

 

 

 

 

Item 4. 

 

Mine Safety Disclosure

 

30

 

 

 

 

 

Item 5. 

 

Other Information

 

30

 

 

 

 

 

Item 6. 

 

Exhibits

 

30

 

 

 

 

 

SIGNATURES 

 

31

 

 

2


 

ITEM 1.     FINANCIAL STATEMENTS

 

ROYAL GOLD, INC.

Consolidated Balance Sheets

(Unaudited, in thousands except share data)

 

 

 

 

 

 

 

 

 

    

September 30, 2018

    

June 30, 2018

ASSETS

 

 

 

 

 

 

Cash and equivalents

 

$

117,078

 

$

88,750

Royalty receivables

 

 

25,106

 

 

26,356

Income tax receivable

 

 

6,381

 

 

40

Stream inventory

 

 

10,011

 

 

9,311

Prepaid expenses and other

 

 

854

 

 

1,350

Total current assets

 

 

159,430

 

 

125,807

Stream and royalty interests, net (Note 2)

 

 

2,458,615

 

 

2,501,117

Other assets

 

 

54,821

 

 

55,092

Total assets

 

$

2,672,866

 

$

2,682,016

LIABILITIES

 

 

 

 

 

 

Accounts payable

 

$

5,055

 

$

9,090

Dividends payable

 

 

16,376

 

 

16,375

Income tax payable

 

 

8,012

 

 

18,253

Withholding taxes payable

 

 

2,551

 

 

3,254

Other current liabilities

 

 

5,377

 

 

4,411

Total current liabilities

 

 

37,371

 

 

51,383

Debt (Note 3)

 

 

354,939

 

 

351,027

Deferred tax liabilities

 

 

91,356

 

 

91,147

Uncertain tax positions

 

 

36,659

 

 

33,394

Other long-term liabilities

 

 

13,275

 

 

13,796

Total liabilities

 

 

533,600

 

 

540,747

Commitments and contingencies (Note 10)

 

 

 

 

 

 

EQUITY

 

 

 

 

 

 

Preferred stock, $.01 par value, 10,000,000 shares authorized; and 0 shares issued

 

 

 —

 

 

 —

Common stock, $.01 par value, 200,000,000 shares authorized; and 65,394,898 and 65,360,041 shares outstanding, respectively

 

 

654

 

 

654

Additional paid-in capital

 

 

2,195,034

 

 

2,192,612

Accumulated other comprehensive loss

 

 

-

 

 

(1,201)

Accumulated losses

 

 

(92,467)

 

 

(89,898)

Total Royal Gold stockholders’ equity

 

 

2,103,221

 

 

2,102,167

Non-controlling interests

 

 

36,045

 

 

39,102

Total equity

 

 

2,139,266

 

 

2,141,269

Total liabilities and equity

 

$

2,672,866

 

$

2,682,016

 

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

3


 

ROYAL GOLD, INC.

Consolidated Statements of Operations and Comprehensive Income

(Unaudited, in thousands except share data)

 

 

 

 

 

 

 

 

 

 

For The Three Months Ended

 

 

September 30, 

 

September 30, 

 

    

2018

    

2017

Revenue

 

$

99,992

 

$

112,476

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

Cost of sales

 

 

16,527

 

 

20,419

General and administrative

 

 

9,927

 

 

6,899

Production taxes

 

 

1,292

 

 

543

Exploration costs

 

 

4,362

 

 

3,203

Depreciation, depletion and amortization

 

 

42,551

 

 

39,692

Total costs and expenses

 

 

74,659

 

 

70,756

 

 

 

 

 

 

 

Operating income

 

 

25,333

 

 

41,720

 

 

 

 

 

 

 

Fair value changes in equity securities

 

 

(1,468)

 

 

 —

Interest and other income

 

 

103

 

 

989

Interest and other expense

 

 

(7,877)

 

 

(8,617)

Income before income taxes

 

 

16,091

 

 

34,092

 

 

 

 

 

 

 

Income tax expense

 

 

(4,115)

 

 

(7,544)

Net income

 

 

11,976

 

 

26,548

Net loss attributable to non-controlling interests

 

 

3,032

 

 

2,083

Net income attributable to Royal Gold common stockholders

 

$

15,008

 

$

28,631

 

 

 

 

 

 

 

Net income

 

$

11,976

 

$

26,548

Adjustments to comprehensive income, net of tax

 

 

 

 

 

 

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

 

 

 —

 

 

197

Comprehensive income

 

 

11,976

 

 

26,745

Comprehensive loss attributable to non-controlling interests

 

 

3,032

 

 

2,083

Comprehensive income attributable to Royal Gold stockholders

 

$

15,008

 

$

28,828

 

 

 

 

 

 

 

Net income per share available to Royal Gold common stockholders:

 

 

 

 

 

 

Basic earnings per share

 

$

0.23

 

$

0.44

Basic weighted average shares outstanding

 

 

65,374,866

 

 

65,235,496

Diluted earnings per share

 

$

0.23

 

$

0.44

Diluted weighted average shares outstanding

 

 

65,497,159

 

 

65,404,680

Cash dividends declared per common share

 

$

0.25

 

$

0.24

 

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

4


 

ROYAL GOLD, INC.

Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

For The Three Months Ended

 

 

September 30, 

 

September 30, 

 

    

2018

    

2017

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

11,976

 

$

26,548

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

42,551

 

 

39,692

Amortization of debt discount and issuance costs

 

 

3,903

 

 

3,679

Non-cash employee stock compensation expense

 

 

2,444

 

 

2,373

Fair value changes in equity securities

 

 

1,468

 

 

Deferred tax benefit

 

 

(1,681)

 

 

(727)

Other  

 

 

 —

 

 

(223)

Changes in assets and liabilities:

 

 

 

 

 

 

Royalty receivables

 

 

1,250

 

 

(2,193)

Stream inventory

 

 

(701)

 

 

89

Income tax receivable

 

 

(6,341)

 

 

(3,854)

Prepaid expenses and other assets

 

 

1,061

 

 

(1,654)

Accounts payable

 

 

(4,060)

 

 

(985)

Income tax payable

 

 

(10,241)

 

 

6,035

Withholding taxes payable

 

 

(703)

 

 

37

Uncertain tax positions

 

 

3,266

 

 

2,493

Other liabilities

 

 

445

 

 

299

Net cash provided by operating activities

 

$

44,637

 

$

71,609

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Acquisition of stream and royalty interests

 

 

(3)

 

 

(5)

Other

 

 

(121)

 

 

100

Net cash (used in) provided by investing activities

 

$

(124)

 

$

95

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Repayment of revolving credit facility

 

 

 —

 

 

(50,000)

Net payments from issuance of common stock

 

 

(1,972)

 

 

(3,529)

Common stock dividends

 

 

(16,376)

 

 

(15,682)

Other

 

 

2,163

 

 

55

Net cash used in financing activities

 

$

(16,185)

 

$

(69,156)

Net increase in cash and equivalents

 

 

28,328

 

 

2,548

Cash and equivalents at beginning of period

 

 

88,750

 

 

85,847

Cash and equivalents at end of period

 

$

117,078

 

$

88,395

 

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

 

 

5


 

Table of Contents

ROYAL GOLD, INC.

Notes to Consolidated Financial Statements

(Unaudited)

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

 

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

 

Summary of Significant Accounting Policies

 

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

 

Recently Adopted Accounting Standards

 

Revenue Recognition

 

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

 

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

 

For the three months ended September 30, 2018, there was no impact to our reported revenue, operating costs and expenses or net income attributable to Royal Gold common stockholders as a result of adopting ASC 606, as compared to legacy revenue guidance under U.S. GAAP.  In addition, no cumulative catch-up adjustment to accumulated losses was required on July 1, 2018 as a result of adopting ASC 606.  Please refer to Note 4 for additional discussion.

 

Recognition and Measurement of Financial Instruments

 

On July 1, 2018, we adopted Accounting Standards Update (“ASU”) 2016-01 – Financial Instrument, which is guidance on the recognition and measurement of financial instruments.  The amended guidance requires, among other things, that equity securities previously classified as available-for-sale be measured at fair value with changes in fair value recognized in net income rather than other comprehensive income (loss) as required under previous guidance.  Upon adoption, the Company recorded a cumulative-effect adjustment in Accumulated losses of $1.2 million.  The change in fair value of our equity securities was approximately $1.5 million for the three months ended September 30, 2018 and is included in Fair value change of marketable equity securities on our consolidated statements of operations and comprehensive income.  The carrying value of the Company’s equity securities as of September 30, 2018 and June 30, 2018 was $17.8 million and $19.2 million, respectively, and is included in Other assets on the Company’s consolidated balance sheets. As of

6


 

Table of Contents

ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

September 30, 2018, the Company owns 682,556 common shares of Contango Ore, Inc. (“CORE”) and 3,379,913 common shares of Rubicon Minerals Corporation.

 

Recently Issued Accounting Standards

 

Leases

 

In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, Leases (Topic 842) which requires recognition of right-of-use assets and lease payment liabilities on the balance sheet by lessees for virtually all leases currently classified as operating leasesUnder ASU 2016-02, companies are permitted to make a policy election to not recognize lease assets or liabilities when the term of the lease is less than twelve months.  The new guidance is effective for the Company’s fiscal year beginning July 1, 2019, and early adoption is permitted.  We are currently evaluating the transition effort and impact, if any, this guidance will have on our consolidated financial statements and footnote disclosures.

 

7


 

Table of Contents

ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

2.    STREAM AND ROYALTY INTERESTS, NET

 

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

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2018 (Amounts in thousands):

    

Cost

    

Accumulated Depletion

    

Net

Production stage stream interests:

 

 

 

 

 

 

 

 

 

Mount Milligan

 

$

790,635

 

$

(155,695)

 

$

634,940

Pueblo Viejo

 

 

610,404

 

 

(125,261)

 

 

485,143

Andacollo

 

 

388,182

 

 

(70,747)

 

 

317,435

Wassa and Prestea

 

 

146,475

 

 

(46,711)

 

 

99,764

Rainy River

 

 

175,727

 

 

(6,939)

 

 

168,788

Total production stage stream interests

 

 

2,111,423

 

 

(405,353)

 

 

1,706,070

Production stage royalty interests:

 

 

 

 

 

 

 

 

 

Voisey's Bay

 

 

205,724

 

 

(90,006)

 

 

115,718

Peñasquito

 

 

99,172

 

 

(39,054)

 

 

60,118

Holt

 

 

34,612

 

 

(21,569)

 

 

13,043

Cortez

 

 

20,878

 

 

(11,275)

 

 

9,603

Other

 

 

483,795

 

 

(371,074)

 

 

112,721

Total production stage royalty interests

 

 

844,181

 

 

(532,978)

 

 

311,203

Total production stage stream and royalty interests

 

 

2,955,604

 

 

(938,331)

 

 

2,017,273

 

 

 

 

 

 

 

 

 

 

Development stage stream interests:

 

 

 

 

 

 

 

 

 

Other

 

 

12,038

 

 

 —

 

 

12,038

 

 

 

 

 

 

 

 

 

 

Development stage royalty interests:

 

 

 

 

 

 

 

 

 

Cortez

 

 

59,803

 

 

 —

 

 

59,803

Other

 

 

74,329

 

 

 —

 

 

74,329

Total development stage royalty interests

 

 

134,132

 

 

 —

 

 

134,132

Total development stage stream and royalty interests

 

 

146,170

 

 

 —

 

 

146,170

 

 

 

 

 

 

 

 

 

 

Exploration stage royalty interests:

 

 

 

 

 

 

 

 

 

Pascua-Lama

 

 

177,690

 

 

 —

 

 

177,690

Other

 

 

117,482

 

 

 —

 

 

117,482

Total exploration stage royalty interests

 

 

295,172

 

 

 —

 

 

295,172

Total stream and royalty interests, net

 

$

3,396,946

 

$

(938,331)

 

$

2,458,615

 

8


 

Table of Contents

ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2018 (Amounts in thousands):

    

Cost

    

Accumulated Depletion

    

Impairments

 

Net

Production stage stream interests:

 

 

 

 

 

 

 

 

 

 

 

 

Mount Milligan

 

$

790,635

 

$

(152,833)

 

$

 —

 

$

637,802

Pueblo Viejo

 

 

610,404

 

 

(114,944)

 

 

 —

 

 

495,460

Andacollo

 

 

388,182

 

 

(59,851)

 

 

 —

 

 

328,331

Wassa and Prestea

 

 

146,475

 

 

(41,601)

 

 

 —

 

 

104,874

Rainy River

 

 

175,727

 

 

(4,028)

 

 

 —

 

 

171,699

Total production stage stream interests

 

 

2,111,423

 

 

(373,257)

 

 

 —

 

 

1,738,166

Total production stage stream and royalty interests

 

 

 

 

 

 

 

 

 

 

 

 

Production stage royalty interests:

 

 

 

 

 

 

 

 

 

 

 

 

Voisey's Bay

 

 

205,724

 

 

(86,933)

 

 

 —

 

 

118,791

Peñasquito

 

 

99,172

 

 

(38,426)

 

 

 —

 

 

60,746

Holt

 

 

34,612

 

 

(21,173)

 

 

 —

 

 

13,439

Cortez

 

 

20,878

 

 

(11,241)

 

 

 —

 

 

9,637

Other

 

 

483,795

 

 

(364,795)

 

 

 —

 

 

119,000

Total production stage royalty interests

 

 

844,181

 

 

(522,568)

 

 

 —

 

 

321,613

Total production stage stream and royalty interests

 

 

2,955,604

 

 

(895,825)

 

 

 —

 

 

2,059,779

Development stage stream interests:

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

12,038

 

 

 —

 

 

 —

 

 

12,038

 

 

 

 

 

 

 

 

 

 

 

 

 

Development stage royalty interests:

 

 

 

 

 

 

 

 

 

 

 

 

Cortez

 

 

59,803

 

 

 —

 

 

 —

 

 

59,803

Other

 

 

74,610

 

 

 —

 

 

(284)

 

 

74,326

Total development stage royalty interests

 

 

134,413

 

 

 —

 

 

(284)

 

 

134,129

Total development stage stream and royalty interests

 

 

146,451

 

 

 —

 

 

(284)

 

 

146,167

 

 

 

 

 

 

 

 

 

 

 

 

 

Exploration stage royalty interests:

 

 

 

 

 

 

 

 

 

 

 

 

Pascua-Lama

 

 

416,770

 

 

 —

 

 

(239,080)

 

 

177,690

Other

 

 

117,481

 

 

 —

 

 

 —

 

 

117,481

Total exploration stage royalty interests

 

 

534,251

 

 

 —

 

 

(239,080)

 

 

295,171

Total stream and royalty interests, net

 

$

3,636,306

 

$

(895,825)

 

$

(239,364)

 

$

2,501,117

 

 

Voisey’s Bay

 

The royalty on production of nickel, copper, cobalt and other minerals from the Voisey’s Bay mine in Newfoundland and Labrador, Canada is directly owned by the Labrador Nickel Royalty Limited Partnership (“LNRLP”), in which the Company’s wholly-owned indirect subsidiary is the general partner and 90% owner. The remaining 10% interest in LNRLP is owned by a subsidiary of Altius Minerals Corporation (“Altius”).

 

On September 13, 2018, LNRLP entered into an agreement with Vale Canada Limited and certain of its subsidiaries (collectively, the “Parties”) to comprehensively settle their long-standing litigation related to calculation of the royalty on the sale of all concentrates produced from the Voisey’s Bay mine.  Refer to Note 14 of our Fiscal 2018 10-K for further discussion on the claims previously asserted by LNRLP.

 

The Parties agreed to a new method for calculating the royalty in respect of concentrates processed at Vale’s Long Harbour Processing Plant, which will be effective for all Voisey’s Bay mine production after April 1, 2018.  Under the terms of the settlement, Royal Gold expects the 3% royalty rate will apply to approximately 50% of the gross metal value in the concentrates at the nickel, copper and cobalt prices prevailing at the time of settlement.  As those metal prices rise or fall, the percentage of gross metal value in the concentrates applicable to the royalty would correspondingly increase or decrease.

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

During the three months ended September 30, 2018, the Company recognized approximately $4.9 million in royalty revenue attributable to Voisey’s Bay metal production from the June 30 and September 30, 2018 quarters.  Royalty payments for each quarter are due 45 days after quarter-end.  Refer to Note 4 for further discussion on our revenue recognition.

 

3.    DEBT

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2018

 

As of June 30, 2018

 

   

Principal

   

Unamortized Discount

   

Debt Issuance Costs

   

Total

   

Principal

   

Unamortized Discount

   

Debt Issuance Costs

   

Total

 

 

 

(Amounts in thousands)

 

 

(Amounts in thousands)

Convertible notes due 2019

 

$

370,000

 

$

(9,512)

 

$

(976)

 

$

359,512

 

$

370,000

 

$

(12,764)

 

$

(1,316)

 

$

355,920

Revolving credit facility

 

 

 —

 

 

 —

 

 

(4,573)

 

 

(4,573)

 

 

 —

 

 

 —

 

 

(4,893)

 

 

(4,893)

Total debt

 

$

370,000

 

$

(9,512)

 

$

(5,549)

 

$

354,939

 

$

370,000

 

$

(12,764)

 

$

(6,209)

 

$

351,027

 

Convertible Senior Notes Due 2019

 

In June 2012, the Company completed an offering of $370 million aggregate principal amount of 2.875% convertible senior notes due 2019 (“2019 Notes”).  The 2019 Notes bear interest at the rate of 2.875% per annum, and the Company is required to make semi-annual interest payments on the outstanding principal balance of the 2019 Notes on June 15 and December 15 of each year, beginning December 15, 2012.  The 2019 Notes mature on June 15, 2019.  Generally, we classify debt that is maturing within one year as a current liability.  However, the Company has the intent and ability to settle the principal amount of the 2019 Notes in cash primarily from its available revolving credit facility, a non-current liability, as of September 30 and June 30, 2018.

 

Interest expense recognized on the 2019 Notes for the three months ended September 30, 2018, was $6.3 million compared to $6.0 million for the three months ended September 30, 2017, and included the contractual coupon interest, the accretion of the debt discount and amortization of the debt issuance costs.

 

Revolving credit facility

 

The Company maintains a $1 billion revolving credit facility.  As of September 30, 2018, the Company had no amounts outstanding and $1 billion available under the revolving credit facility.  Interest expense recognized on the revolving credit facility for the three months ended September 30, 2018 was $0.3 million (amortization of debt issuance costs only) and $1.8 million, for the three months ended September 30, 2017, which included interest on the outstanding borrowings and the amortization of the debt issuance costs.  Royal Gold may repay any borrowings under the revolving credit facility at any time without premium or penalty.

 

As discussed in Note 5 to the notes to consolidated financial statements in the Company’s Fiscal 2018 10-K, the Company has financial covenants associated with its revolving credit facility.  As of September 30, 2018, the Company was in compliance with each financial covenant.

 

4.    REVENUE

 

Revenue Recognition

 

Under current ASC 606 guidance, a performance obligation is a promise in a contract to transfer control of a distinct good or service (or integrated package of goods and/or services) to a customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, a performance obligation is satisfied. In accordance with this guidance, revenue attributable to our stream interests and royalty interests is generally recognized at

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

the point in time that control of the related metal production transfers to our customers.  The amount of revenue we recognize further reflects the consideration to which we are entitled under the respective stream or royalty agreement.  A more detailed summary of our revenue recognition policies for our stream and royalty interests is discussed below.

 

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 of the metals produced from a mine, at a price determined for the life of the transaction by the purchase agreement. Gold, silver and copper received under our metal streaming agreements are taken into inventory, and then sold primarily using average spot rate gold, silver and copper forward contracts.  The sales price for these average spot rate forward contracts is determined by the average daily gold, silver or copper spot prices during the term of the contract, typically a consecutive number of trading days between ten days and three months (depending on the frequency of deliveries under the respective streaming agreement and our sales policy in effect at the time) commencing shortly after receipt and purchase of the metal. We settle our forward sales contracts via physical delivery of the metal to the purchaser (our customer) on the settlement date specified in the contract. Under our forward sales contracts, there is a single performance obligation to sell a contractually specified volume of metal to the purchaser, and we satisfy this obligation at the point in time of physical delivery. Accordingly, revenue from our metal sales is recognized on the date of settlement, which is the date that control, custody and title to the metal transfer to the purchaser.

 

Royalty Interests

 

Royalties are non-operating interests in mining projects that provide the right to a percentage of revenue or metals produced from the project after deducting specified costs, if any. We are entitled to payment for our royalty interest in a mining project based on a contractually specified commodity price (monthly or quarterly average spot price) for the period in which metal production occurred.  As a royalty holder, we act as a passive entity in the production and operations of the mining project, and the third-party operator of the mining project is responsible for all mining activities, including subsequent marketing and delivery of all metal production to their ultimate customer. In all of our material royalty interest arrangements, we have concluded that we transfer control of our interest in the metal production to the operator at the point at which production occurs, and thus, the operator is our customer.  We have further determined that the transfer of each unit of metal production, comprising our royalty interest, to the operator represents a separate performance obligation under the contract, and each performance obligation is satisfied at the point in time of metal production by the operator.  Accordingly, we recognize revenue attributable to our royalty interests in the period in which metal production occurs at the specified commodity price per the agreement, net of any contractually allowable offsite treatment, refining, transportation and, if applicable, mining costs.

 

Royalty Revenue Estimates

 

For a small number of our royalty interests, we may not receive, or be entitled to receive, payment information, including production information from the operator, for the period in which metal production occurred prior to issuance of our financial statements.  As a result, we may estimate revenue for these royalties based on available information, including public information, from the operator.  If adequate information is not available from the operator or from other public sources before we issue our financial statements, the Company will recognize royalty revenue during the period in which the necessary payment information is received.  Differences between estimates and actual amounts could differ significantly and are recorded in the period that the actual amounts are known.  Please also refer to our “Use of Estimates” accounting policy discussed in our Fiscal 2018 10-K.   For the period ended September 30, 2018, royalty revenue that was estimated or was attributable to metal production for a period prior to September 30, 2018, was not material. 

 

Disaggregation of Revenue

 

We have identified two material revenue sources in our business: stream interests and royalty interests. These identified revenue sources are consistent with our reportable segments as discussed in Note 8.

 

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Revenue by metal type attributable to each of our revenue sources is disaggregated as follows:  

 

 

 

 

 

 

 

Three Months Ended

 

    

September 30, 2018

Stream revenue:

 

 

 

Gold

 

$

59,114

Silver

 

 

8,720

Copper

 

 

2,203

Total stream revenue

 

$

70,037

Royalty revenue:

 

 

 

Gold

 

$

18,554

Silver

 

 

1,352

Copper

 

 

3,615

Other

 

 

6,434

Total royalty revenue

 

$

29,955

Total revenue

 

$

99,992

 

Revenue attributable to our principal stream and royalty interests is disaggregated as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

    

 

Metal(s)

    

September 30, 2018

Stream revenue:

 

 

 

 

 

 

Andacollo

 

 

Gold

 

$

27,743

Pueblo Viejo

 

 

Gold & Silver

 

 

19,486

Mount Milligan

 

 

Gold & Copper

 

 

8,847

Wassa and Prestea

 

 

Gold

 

 

8,061

Other

 

 

Gold & Silver

 

 

5,900

Total stream revenue

 

 

 

 

$

70,037

Royalty revenue:

 

 

 

 

 

 

Peñasquito

 

 

Gold, Silver, Lead & Zinc

 

$

3,637

Cortez

 

 

Gold

 

 

603

Other

 

 

Various

 

 

25,715

Total royalty revenue

 

 

 

 

$

29,955

Total revenue

 

 

 

 

$

99,992

 

Please refer to Note 8 for the geographical distribution of our revenue by reportable segment.

 

Contract Receivables

 

Under our forward sales contracts related to our metal streaming arrangements, payment is due from the purchaser on the day of settlement. Accordingly, our metal stream sales contracts do not give rise to a receivable under ASC 606.

 

Under our royalty arrangements, payment is typically due by the royalty payor either (i) monthly, typically thirty days after month-end or (ii) quarterly, typically thirty to sixty days after the respective quarter-end.  Revenue related to production that has occurred as of the reporting date but for which payment has not been received represents a receivable (rather than a contract asset) under ASC 606, as payment by the operator is unconditional upon the production of metal.  As of September 30, 2018, and June 30, 2018, our royalty receivables were $25.1 million and $26.4 million, respectively.

 

Practical Expedients Utilized

 

Our forward sales contracts related to our metal streaming arrangements are short-term in nature with a term of one year or less. For these contracts, we have utilized the practical expedient allowed in ASC 606 that exempts us from presenting the transaction price allocated to remaining performance obligations (i.e. forecasts of unearned revenue) for contracts with an original expected term of one year or less.

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

 

Our royalty arrangements generally cover metal production over the life of a mine and, thus, have a contract term that is greater than one year.  Under these contracts, variability related to future production volumes and market pricing is allocated entirely to those future production volumes from the mining operation. Consequently, we have utilized an alternative practical expedient allowed in ASC 606 that exempts us from presenting the transaction price allocated to remaining performance obligations (i.e. forecasts of unearned revenue) if the variable consideration in a contract is allocated entirely to a wholly unsatisfied performance obligation.

 

 

5.    STOCK-BASED COMPENSATION

 

The Company recognized stock-based compensation expense as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

September 30, 

 

September 30, 

 

    

2018

    

2017

 

 

 

(Amounts in thousands)

Stock options

 

$

120

 

$

91

Stock appreciation rights

 

 

766

 

 

488

Restricted stock

 

 

1,280

 

 

1,426

Performance stock

 

 

278

 

 

368

Total stock-based compensation expense

 

$

2,444

 

$

2,373

 

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

 

During the three months ended September 30, 2018, the Company granted the following stock-based compensation awards:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

September 30, 

 

 

September 30, 

 

    

 

2018

    

 

2017

 

 

 

(Number of shares)

Stock options

 

 

6,430

 

 

6,858

Stock appreciation rights

 

 

69,360

 

 

71,262

Restricted stock

 

 

42,260

 

 

50,380

Performance stock (at maximum 200% attainment)

 

 

57,420

 

 

68,020

Total equity awards granted

 

 

175,470

 

 

196,520

 

As of September 30, 2018, unrecognized compensation expense (expressed in thousands below) and weighted-average vesting period for each of our stock-based compensation awards were as follows:

 

 

 

 

 

 

 

 

 

 

Unrecognized

    

Weighted-

 

 

compensation

 

average vesting

 

 

expense

    

period (years)

Stock options

 

$

227

 

 

2.2

Stock appreciation rights

 

 

2,949

 

 

2.2

Restricted stock

 

 

6,307

 

 

3.4

Performance stock

 

 

1,736

 

 

2.1

 

 

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

6.    EARNINGS PER SHARE (“EPS”)

 

Basic earnings per common share were computed using the weighted average number of shares of common stock outstanding during the period, considering the effect of participating securities.  Unvested stock-based compensation awards that contain non-forfeitable rights to dividends or dividend equivalents are considered participating securities and are included in the computation of earnings per share pursuant to the two-class method.  The Company’s unvested restricted stock awards contain non-forfeitable dividend rights and participate equally with common stock with respect to dividends issued or declared.  The Company’s unexercised stock options, unexercised SSARs and unvested performance stock do not contain rights to dividends.  Under the two-class method, the earnings used to determine basic earnings per common share are reduced by an amount allocated to participating securities. Use of the two-class method has an immaterial impact on the calculation of basic and diluted earnings per common share.

 

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

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

September 30, 

 

September 30, 

 

    

2018

    

2017

 

 

 

(in thousands, except per share data)

Net income available to Royal Gold common stockholders

 

$

15,008

 

$

28,631

Weighted-average shares for basic EPS

 

 

65,374,866

 

 

65,235,496

Effect of other dilutive securities

 

 

122,293

 

 

169,184

Weighted-average shares for diluted EPS

 

 

65,497,159

 

 

65,404,680

Basic earnings per share

 

$

0.23

 

$

0.44

Diluted earnings per share

 

$

0.23

 

$

0.44

 

The calculation of weighted average shares includes all of our outstanding common stock.  The Company intends to settle the principal amount of the 2019 Notes in cash from amounts available under our revolving credit facility.  As a result, there will be no impact to diluted earnings per share unless the share price of the Company’s common stock exceeds the conversion price of $102.43.

 

7.    INCOME TAXES

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

September 30, 

 

September 30, 

 

    

2018

    

2017

 

 

(Amounts in thousands, except rate)

Income tax expense

 

$

4,115

 

$

7,544

Effective tax rate

 

 

25.6%

 

 

22.1%

 

The increase in the effective tax rate for the three months ended September 30, 2018 was primarily related to fewer discrete tax benefits attributable to equity award vesting and exercises in the current quarter as compared to the quarter ending September 30, 2017.

 

The Company will continue to analyze H.R. 1, originally known as the Tax Cuts and Jobs Act (the “Act”), for additional information and guidance including supplemental legislation, regulatory guidance, or evolving technical interpretations as they become available.  The final Act impacts may differ from the recorded amounts as of September 30, 2018 and the Company will continue to refine such amounts within the measurement period provided by Staff Accounting Bulletin No. 118.  The Company expects to complete its analysis during the second quarter of fiscal year 2019.

 

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

8.    SEGMENT INFORMATION

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2018

 

As of June 30, 2018

 

 

 

 

 

 

 

 

Total stream

 

 

 

 

 

 

 

 

 

 

Total stream

 

 

Stream

 

Royalty

 

and royalty

 

Stream

 

Royalty

 

 

 

 

and royalty

 

  

interest

  

interest

  

interests, net

  

interest

  

interest

  

Impairments

  

interests, net

Canada

 

$

803,727

 

$

209,725

 

$

1,013,452

 

$

809,500

 

$

214,562

 

$

(284)

 

$

1,023,778

Dominican Republic

 

 

485,143

 

 

 —

 

 

485,143

 

 

495,460

 

 

 —

 

 

 —

 

 

495,460

Chile

 

 

317,434

 

 

214,226

 

 

531,660

 

 

328,331

 

 

453,306

 

 

(239,080)

 

 

542,557

Africa

 

 

99,764

 

 

495

 

 

100,259

 

 

104,874

 

 

502

 

 

 —

 

 

105,376

Mexico

 

 

 —

 

 

90,243

 

 

90,243

 

 

 —

 

 

93,277

 

 

 —

 

 

93,277

United States

 

 

 —

 

 

164,987

 

 

164,987

 

 

 —

 

 

165,543

 

 

 —

 

 

165,543

Australia

 

 

 —

 

 

33,622

 

 

33,622