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Royal Gold Banks on Rising Gold Prices Amid Coronavirus Woes

Zacks Equity Research
·6 mins read

On Sep 21, 2020 we issued an updated research report on Royal Gold, Inc. RGLD. The company is likely to benefit from the rally in gold prices and ramping up of new projects. Focus on acquisitions and new business investments aided by a deleveraged strong balance sheet bode well. However, suspension of mining operations owing to the pandemic might impact the company's results in the forthcoming quarters.

Solid Q4 & Fiscal 2020 Results

On Aug 5, Royal Gold reported fourth-quarter fiscal 2020 (ended Jun 30, 2020) results. Adjusted earnings per share came in at 53 cents in fourth-quarter fiscal 2020, beating the Zacks Consensus Estimate of 50 cents and also marked year-over-year improvement of 20%. Despite the COVID-19 crisis, Royal Gold reported record revenues, operating cash flow and earnings in fiscal 2020. While revenues were $499 million, earnings for fiscal 2020 amounted to $2.47. Gold equivalent ounces were 320,000, down slightly from the prior year owing to impacts from COVID-19-related production disruptions. However, this volume reduction was mitigated by substantially higher realized gold price that drove revenues.

Higher Gold Prices to Boost Top Line

Gold continues to be the most significant revenue driver and accounted for 84% of Royal Gold’s total revenues in fourth-quarter fiscal 2020. Gold prices have surged 28% so far this year fueled by the coronavirus pandemic. Going forward, the combination of lower mined gold supply and higher demand, and geopolitical tensions are likely to drive prices north. This bodes well for Royal Gold.

Solid Balance Sheet to Aid Growth

Royal Gold remains focused on allocating its strong cash flow to dividends, debt reduction and new business. During fiscal 2020, the company reduced net debt by $115 million, paid $71.5 million in dividends, and funded $135.7 million in advance payments toward its silver stream at Khoemacau. As of Jun 30, 2020, the company had $695 million available and $305 million outstanding under its revolving credit facility. The company has a low total debt-to-total capital of 11.5%, which compares favorably with the industry's 22.8%. Its times interest earned is a healthy 20.6, higher than the industry’s 16.9. The company has also raised its dividend for the 19th consecutive year. Royal Gold’s strong balance sheet and liquidity position poise it well to navigate through the coronavirus-induced crisis while returning value to shareholders.

Royal Gold added the high-quality long-life Khoemacau development project to its stream portfolio in February 2019. Royal Gold’s silver mine life-purchase agreement with Khoemacau Copper Mining Limited, highlights the purchase and sale of silver, produced from the Khoemacau Copper Project in Botswana. Royal Gold will receive 80% of the silver production from the Khoemacau project.  Construction is on track with 54% of the same completed as of Jun 30, 2020. So far Royal Gold has made a total contribution of $146.8 million.

Operator’s Mines Back on Track, COVID-19 Impact Looms

The company’s revenues are derived entirely from stream and royalty interests in properties owned and operated by third parties. Several operating counterparties had to temporarily suspend mine operations in adherence to government mandates owing to the pandemic. Even though the mines have resumed operations lately, considering the resurgence of cases and the uncertainty of the situation, they may have to be cease operations again. Further, extension of production curtailment at mining properties is likely to have a material impact on Royal Gold’s revenues and financials until the situation stabilizes.

On Dec 13, 2019, Newmont Corporation NEM which operates the Peñasquito mine, provided full-year 2020 production guidance at 510,000 ounces of gold, 28 million ounces of silver, 360 million pounds of zinc, and 190 million pounds of lead. After a temporary suspension due to the COVID-19 crisis, production has gone back to pre-COVID levels in June. Also, the Peñasquito mine and the San Juan de Cedros 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. The Peñasquito property will continue to be a significant revenue generator for Royal Gold.

Barrick Gold Corporation GOLD continues to advance feasibility study for the process plant expansion and proposed tailings storage facility for extension of the mine life at Pueblo Viejo mine. The company estimates that process plant and tailings expansion project is likely to significantly increase throughput and allow the mine to maintain average annual gold production of approximately 800,000 ounces after calendar-year 2022, while the increase in tailings storage capacity has the potential to convert approximately 11 million ounces of mineralized material to reserves. For calendar year 2020, Barrick Gold indicated production attributable to their interest at Pueblo Viejo is expected in the range of 530,000-580,000 ounces of gold.

RGLD Gold AG, owns the right to purchase 35% of the payable gold and 18.75% of the payable copper produced from the Mount Milligan copper-gold mine in British Columbia, Canada. Mount Milligan is operated by an indirect subsidiary of Centerra Gold Inc. For fiscal 2020, Centerra continues to expect consolidated gold production between 140,000 ounces and 160,000 ounces and payable copper production of 80-90 million pounds from Mount Milligan.

Price Performance

Over the past year, Royal Gold has declined 5.6% against the industry’s rally of 44.8%.

Zacks Rank & a Stock to Consider

Royal Gold currently carries a Zacks Rank #3 (Hold).

A better-ranked stock in the basic materials space is DAQO New Energy Corp. DQ, which currently sports a Zacks Rank #1 (Strong Buy).  You can see the complete list of today’s Zacks #1 Rank stocks here.

DAQO New Energy has a projected earnings growth rate of 349% for the current year. The company’s shares have gained 119% in a year’s time.

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