DENVER--(BUSINESS WIRE)-- Royal Gold, Inc. (NASDAQ: RGLD) (together with its subsidiaries, “Royal Gold” or the “Company,” “we” or “our”) reports a net loss of $15 million, or ($0.23) per share, on revenue of $114 million in its fiscal second quarter ended December 31, 2017 (“second quarter”). Second quarter reported earnings reflected the impact of recently enacted U.S. tax legislation and a non-cash functional currency election. Absent these impacts, adjusted net income1 was $28 million, or $0.41 per share, up 16% from the prior year quarter.
An expense of $26.4 million, or $0.40 per share related to U.S. tax legislation was recorded during the second quarter. As a United States domiciled company, we expect that the U.S. tax legislation will have a positive long-term impact on Royal Gold’s future financial results through the reduction in the U.S. corporate tax rate from 35% to 21% and by allowing us to efficiently repatriate future foreign earnings.
We also recorded an expense of $15.9 million, or $0.24 per share, related to a non-cash functional currency election to file certain Canadian income tax returns in U.S. dollars. This election is intended to reduce the volatility of Royal Gold’s effective tax rate due to quarterly mark-to-market adjustments.
Second Quarter Highlights Compared to Prior Year Quarter:
• Revenue of $114 million, an increase of 7%
• Operating cash flow of $76 million, an increase of 8%
• Volume of 89,700 GEOs,2 an increase of 2%
• Dividends paid of $16 million, an increase of 5%
• Repaid an additional $50 million on revolving credit facility
• Average gold price of $1,275, an increase of 4%
“We are pleased to deliver another quarter of strong, steady performance,” commented Tony Jensen, President and CEO. “While one-time and non-cash adjustments impacted our reported earnings, we demonstrated solid revenue and cash flow growth. We received our first deliveries of gold and silver from Rainy River, continued to pay down debt, and increased our dividend for the 17th straight year. Looking forward to the rest of calendar 2018, we expect to see growth from new production at Rainy River, a higher stream rate at Wassa and Prestea, initial production from Cortez Crossroads, and the implementation of the Peñasquito Pyrite Leach Project.”
US Tax Reform
On December 22, 2017, H.R. 1, originally known as the Tax Cuts and Jobs Act (the “Act”), was enacted and is effective for tax years including January 1, 2018. Certain effects of the Act are recognized in the period of enactment, or the period ending December 31, 2017. Certain other aspects of the Act are not effective for fiscal June 30 companies until July 1, 2018.
The Act, among other things, reduced the U.S. corporate income tax rate to 21% starting January 1, 2018. As a United States domiciled company, we expect that the Act will have a positive long-term impact on Royal Gold’s future financial results through the reduction in the U.S. corporate tax rate from 35% to 21% and by allowing us to efficiently repatriate future foreign cash flows from our foreign subsidiaries. As the Company is a fiscal year taxpayer, we applied a blended federal U.S. income tax rate of approximately 28.1% for the fiscal year ending June 30, 2018. The blended percentage was calculated on a pro-rata percentage of the number of days in the fiscal year occurring before and after January 1, 2018. Our U.S. statutory federal corporate income tax rate will be 21% for the fiscal year commencing on July 1, 2018 and all future years. We estimate that our effective tax rate in the second half of fiscal 2018 will be between 17% and 23%.
As a result of the Act, we recorded an expense of $26.4 million in the second quarter. This amount, which is included in income tax expense on our consolidated statements of operations and comprehensive income, consists of three components: (i) an $11.5 million charge relating to the one-time mandatory tax on the net accumulated post-1986 untaxed earnings and profits of the Company’s foreign subsidiaries, which we will elect to pay over an eight-year period, (ii) a $2.3 million benefit resulting from the re-measurement of the Company’s net deferred tax assets and liabilities, and (iii) a $17.2 million charge related to re-measurement of the U.S. income tax impacts resulting from foreign uncertain tax positions.
Functional Currency Election
As indicated above, we recorded an expense of $15.9 million related to the effects of a non-cash functional currency election to file certain Canadian income tax returns in U.S. dollars. Prior to the functional currency election, certain deferred tax liabilities were measured on the difference between adjusted Canadian dollar acquisition cost and Canadian dollar tax basis. These deferred tax liabilities were then marked-to-market every quarter, for income tax expense (benefit) purposes, to account for changes in the Canadian dollar to U.S. dollar exchange rate. Post-election, the applicable deferred tax liabilities will be measured on the difference between U.S. GAAP value and U.S. dollar tax basis, and eliminating volatility in the effective tax rate caused by this mark-to-market adjustment.
On December 27, 2017, Centerra reported that mill processing operations at Mount Milligan were temporarily suspended due to a lack of sufficient water resources, as a result of Mount Milligan experiencing a drier than normal spring and summer in calendar 2017, with lower than average spring snow melt.
On February 5, 2018, Centerra reported that it recommenced mill processing operations at partial capacity. During the recent shutdown, Centerra completed a number of steps to increase the flow of water into the tailings storage facility (“TSF”) from which the Mount Milligan mill draws all of its water requirements to supply milling operations. Such steps included adding pumps to existing water wells, increasing pump sizes to increase the flow rate, and drilling additional wells. Current make-up water sources for the TSF are from normal surface run-off, groundwater wells internal to the TSF, and from base underdrain towers that access process water underlying the TSF.
Centerra expects to resume milling operations at full capacity in April, when additional fresh water becomes available from surface run-off after the spring melt. As a further, longer-term mitigation measure, Centerra filed an amendment to Mount Milligan’s Environmental Assessment to allow pumping of water from a nearby lake (Phillip Lake) and has received additional related permits.
Due to the timing of shipments and deliveries of gold and copper, the impact of the temporary shutdown is likely to be reflected in Royal Gold’s mid-calendar 2018 results, as some of the deliveries of gold and copper that were expected in the June through August 2018 period will be deferred to a later date.
On January 18, 2018, Barrick reported that it is analyzing a revised sanction related to the Pascua-Lama project issued by Chile’s Superintendencia del Medio Ambiente (“SMA”) on January 17, 2018. The sanction is part of a re-evaluation process ordered by Chile’s Environmental Court in 2014 and relates to historical compliance matters at the Pascua-Lama project. According to Barrick, the SMA has not revoked Pascua-Lama’s environmental permit, but has ordered the closure of existing facilities on the Chilean side of the project, in addition to certain monitoring activities.
Barrick also reported that closure of existing surface facilities in Chile is consistent with its plan to advance a prefeasibility study for underground mining operations at Pascua-Lama, which would address a number of community concerns by reducing the overall environmental impact of the project. Barrick reported that it is currently undertaking a number of optimization studies in order to complete the prefeasibility study.
On February 6, 2018, in light of the SMA order to close surface facilities in Chile, and current plans to evaluate an underground mine, Barrick announced it is reclassifying Pascua-Lama’s proven and probable gold reserves3 of approximately 14 million ounces, which are based on an open pit mine plan, as mineralized material.4 Barrick reported that it will include further details in its February 14, 2018 year-end results release and an update on the Pascua-Lama project at its February 22, 2018 Investor Day.
We own a 0.78% to 5.45% sliding-scale net smelter return (“NSR”) gold royalty and a 1.09% NSR copper royalty on the Pascua-Lama project. Our royalty interests are applicable to all gold and copper production from the portion of the Pascua-Lama project lying on the Chilean side of the border. The Company’s carrying value for its royalty interests at Pascua-Lama is approximately $416.8 million as of December 31, 2017. We are currently evaluating Barrick’s reserves reclassification announcement to properly assess the impact, if any, of our carrying value at Pascua-Lama.
Wassa and Prestea
Under our stream agreement, the gold stream percentage at Wassa and Prestea increased to 10.5%, from 9.25%, effective January 1, 2018. Golden Star expects consolidated calendar 2018 gold production to be between 230,000 and 255,000 ounces.
On October 19, 2017, New Gold announced that its Rainy River mine, located near Fort Frances, Ontario, achieved commercial production approximately two weeks ahead of schedule. The milling rate for the month of December averaged 21,000 tonnes per day, which is the nameplate capacity for the facility. New Gold estimates that approximately 21,500 ounces of gold and 185,000 ounces of silver will be delivered to Royal Gold in calendar 2018.
Royal Gold has a streaming interest on 6.5% of the gold (3.25% after delivery of 230,000 ounces) and 60% of the silver (30% after delivery of 3,100,000 ounces) produced at Rainy River. At calendar year-end 2016, New Gold reported reserves of approximately 3.9 million ounces of gold reserves and 10 million ounces of silver reserves at Rainy River.3
Second Quarter Overview
Second quarter revenue was $114.4 million compared to $107.0 million in the prior year quarter. Stream and royalty revenue totaled $79.3 million and $35.1 million, respectively, for the second quarter. Revenue increased due to higher gold production at Andacollo, Wassa and Prestea, and new gold production from our Rainy River stream, partially offset by a net revenue decrease at Mount Milligan.
Second quarter cost of sales of $19.9 million was below the $22.5 million recorded in the prior year quarter, driven by lower gold sales from Mount Milligan.
General and administrative expenses increased to $9.6 million in the second quarter, compared to $7.5 million in the prior year quarter. The increase was primarily related to an increase in legal costs of approximately $1.7 million.
Exploration costs, which are related to our Peak Gold Joint Venture, were $1.4 million in the second quarter, a decrease from the prior year quarter.
Interest and other income was $0.6 million, down from $7.5 million in the prior year quarter, when the Company recognized several one-time items.
Income tax expense totaled $48.4 million, compared with an income tax expense of $5.0 million in the prior year quarter. This resulted in an effective tax rate of 148.5% in the current period, compared with 15.7% in the prior year quarter. The increase in the effective tax rate is primarily attributable to the effects of U.S. tax reform and a non-cash functional currency election at certain of our Canadian subsidiaries.
At December 31, 2017, we had current assets of $165.5 million compared to current liabilities of $41.6 million, resulting in working capital of $123.9 million. This compares to current assets of $155.8 million and current liabilities of $39.7 million at September 30, 2017, resulting in working capital of $116.1 million.
During the second quarter, liquidity needs were met from our available cash resources and $94.5 million in revenue net of our streaming payments. The Company repaid $50 million of the outstanding revolving credit facility during the quarter resulting in $850 million available and $150 million outstanding under its revolving credit facility as of December 31, 2017. Working capital, combined with the Company’s undrawn revolving credit facility, totaled approximately $975 million of liquidity at December 31, 2017.
A summary of second quarter and historical production reported can be found on Tables 1 and 2. Calendar year 2017 operator production estimates of certain properties in which we have interests compared to actual production through December 31, 2017 can be found on Table 3. Results of our streaming business for the second quarter, compared to the prior year quarter, can be found on Table 4. Highlights at certain of the Company’s principal producing and development properties during the second quarter, compared to the prior year quarter, are detailed in our Annual Report on Form 10-K.
Adjusted Net Income is a non-GAAP measure. Please see Schedule A for reconciliation.
2 Gold Equivalent Ounces, (“GEOs”) are calculated as revenue divided by the average gold price for the same period. GEOs net of stream payments were 74,100 in the second quarter, compared to 69,100 in the prior year quarter.
3 Cautionary Note to U.S. Investors Concerning Estimates of Proven and Probable Mineral Reserves and Measured and Indicated Mineral Resources: The mineral reserve estimates reported by Barrick and New Gold were prepared in accordance with Canadian Institute of Mining, Metallurgy and Petroleum Definition Standards for Mineral Resources and Mineral Reserves. Royal Gold has not reconciled the reserve estimates provided by Barrick and New Gold with definitions of reserves used by the U.S. Securities and Exchange Commission.
4 The U.S. Securities and Exchange Commission does not recognize this term. Mineralized material is that part of a mineral system that has potential economic significance but cannot be included in the proven and probable ore reserve estimates until further drilling and metallurgical work is completed, and until other economic and technical feasibility factors based upon such work have been resolved. Investors are cautioned not to assume that any part or all of the mineral deposits in this category will ever be converted into reserves.
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