On Thursday royalty and streaming company Royal Gold (NASDAQ:RGLD) announced its second quarter 2014 results for the period ended December 31. The stock fell by 3.6 percent despite the fact that its closest peer — Franco Nevada (NYSE:FNV) — traded flat. This suggests that the market didn’t like the news release. However if we take a closer look at it we find underlying strength.
The company reported earnings of $10.7 million, or $0.16/share. This is far below last year’s $27.2 million, or $0.42/share. This decline was due predominantly to a lower gold price. In fact, if we look at the company’s underlying business we see that it grew. First, the company initiated agreements with Barrick Gold (NYSE:ABX) to buy a 1 percent royalty on the Goldrush property in Nevada. This mine is not yet producing, but it contains over 8 million ounces of gold and it is possible that Barrick can expand the resource. The company also expanded its agreement with Barrick on its Cortez royalty, which is a project nearby the Goldrush project.
Second, the company saw its first shipment of gold from the Mt. Milligan streaming agreement. While the company has dozens of these deals in place the Mt. Milligan deal with Thompson Creek Metals (NYSE:TC) is by far the company’s largest. The quarter’s total shipment from Mt. Milligan was minimal, but it shows that Thompson Creek is on the right track — and it should be able to bring the mine to full production capacity later this year. This is going to greatly expand Royal Gold’s cash-flow, and it means that the company will have more capital with which to make royalty deals with mining companies who need capital in this depressed gold price environment.
Third, the company expanded its credit facility from $350 million to $450 million. Not only will it have more borrowing power, but its borrowing rate went down from 1.75 percent over LIBOR to 1.25 percent over LIBOR. This gives the company even more ammunition to make additional royalty deals in the coming quarters.
Given all of these points, I would say that this quarter was extremely productive for Royal Gold, and I think it is a solid investment idea for those interested in getting exposure to the price of gold.
That being said, there is one thing that I didn’t like about the quarter: the company increased its exposure to Barrick Gold’s properties. The company already has a lot of exposure to Barrick properties. Most notably, one of its most valuable royalties is held on the Pascua Lama project in Chile and Argentina. Last October, Barrick announced that it is suspending the development of the Pascua Lama mine as a means to reducing costs. But this isn’t the only project owned by Barrick on which Royal Gold owns a royalty. Aside from Goldrush and Cortez, the company has royalty agreements in place on the following Barrick properties.
- Bald Mountain
- Gold Hill [JV with Kinross Gold (NYSE:KGC)]
- Marigold [JV with Goldcorp (NYSE:GG)]
- Ruby Hill
This is a lot, and going forward, I hope that the company reduces its exposure to Barrick properties by expanding into projects that aren’t run by Barrick. As an investor in Royal Gold who is skeptical of Barrick’s past performance, I will have to reevaluate my bullish stance on Royal Gold should it continue to make royalty agreements with Barrick without diversifying its exposure to other potential partners.