On Dec 13, we issued an updated research report on Royal Gold, Inc. RGLD. Royal Gold expects to benefit from the ramping up of new mines. Also, its focus on acquisitions and strong balance sheet bode well. However, lower gold prices are a concern.
Lower Prices & Water Supply Drag Q1 Earnings
Royal Gold’s adjusted earnings per share of 23 cents in first-quarter fiscal 2019 declined 48% year over year. Soft sales, lower metal prices, higher legal expenses and the adoption of new accounting guidance for equity securities led to the decline in the reported quarter’s earnings.
Revenues were also impacted by reduced sales at Mount Milligan. This was mainly caused by the temporary shutdown of the mill processing facility in early calendar 2018, resulting from lack of sufficient water sources. Centerra — the operator of Mount Milligan mine — stated that it has received the approval for the use of short-term water sources through Nov 15, 2018.
For the medium term, Centerra has submitted an application to authorities to allow water draw from a number of other sources at rates that are protective of the environment until 2021. Discussions are ongoing, and Centerra believes that access to these sources may be granted as early as January 2019.
However, these applications have not yet been granted and as the flow from the approved short-term water sources declines during the calendar fourth quarter and the remainder of the winter season, Centerra expects to reduce Mount Milligan throughput to properly manage its water balance until the water flow increases in the spring of 2019. Further, the currently-approved sources will provide limited amount of water in the near term, and there is no guarantee for the sufficiency and availability of additional water sources, adding to concerns. Consequently, Centerra is trying to reach a long-term water solution.
Tepid Guidance for Q2
The company expects sales and deliveries for fiscal second-quarter 2019 to be impacted by the timing of metal shipments. Mount Milligan did not ship any concentrates in July due to rail transportation issues, and the August shipments are not anticipated to reach final settlement until the March quarter.
Further, Pueblo Viejo's provisional payment schedule recently changed, leading to lower deliveries in the fiscal 2019 first quarter. This is likely to increase the correspondingly lower sales in the current quarter. Consequently, sales for fiscal second-quarter 2019 will be in line with that in fiscal first-quarter 2018, with a modest reduction in inventory at quarter end.
Settlement of Voisey’s Bay Dispute a Growth Driver
Royal Gold has settled its long-standing litigation with VALE S.A VALE on their world-class Voisey's Bay mine in Newfoundland and Labrador. The company recognized $4.9 million in total for royalty payments in fiscal first-quarter 2019. Reportedly, Vale will be investing $1.7 billion to develop the underground resources that will extend the mine life from 2023 to 2034.
The resolution of the dispute gives Royal Gold the exposure to a world-class operating asset that ensures its shareholders a steady stream of royalty revenues. The company expects Voisey's Bay to again feature among its top 10 revenue generators.
Peak Gold Project Holds Promise
Royal Gold announced that the Peak Gold joint venture, in which its subsidiary Royal Alaska holds a 40% interest, has completed a Preliminary Economic Assessment (“PEA”) on the Peak Gold Project located near Tok, Alaska. The PEA presents a robust open pit mining operation and enticing economics at base case gold and silver prices.
Growth Drivers Ahead
There are other several catalysts for the company coming up, which include the beginning of production at Cortez Crossroads, early deployment of the Peñasquito Pyrite Leach Project and production improvements at Rainy River. It will be aided further by progress at the pilot pre-oxidation plant at Pueblo Viejo, and a preliminary economic assessment at the Peak Gold joint venture. However, lower gold prices remain a concern.
On Oct 3, 2018, the company purchased the second and final tranche of Contango Ore, Inc. common stock (127,188 shares) for $26 per share. The company had earlier acquired 682,556 shares of Contango in June 2018 for $26 per share, pursuant to a Stock Purchase Agreement, inked on Apr 5, 2018, between Royal Gold and certain individual stockholders of CORE. The company anticipates to acquire more companies that hold stream and royalty interests. This buyout will drive revenues.
The company's shares have outperformed the industry it belongs to, over the past year. Its shares have lost around 6%, while the industry witnessed a decline of 9%.
Zacks Rank & Stocks to Consider
Royal Gold currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the basic materials space are CF Industries Holdings, Inc. CF and Nexeo Solutions, Inc. NXEO, both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
CF Industries has an expected long-term earnings growth rate of 6%. The company’s shares have gained 2% in the past year.
Nexeo Solutions has an expected long-term earnings growth rate of 30.6%. Its shares have moved up 6.5% in a year’s time.
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