What We Learned From Royal Gold's Q3 Update

| About: Royal Gold, (RGLD)


RGLD Gold AG sold 54,300 ounces, down from 61,600 sold in Q2 2016.

Realized average selling price of $1,168 per ounce, up from $1,094 per ounce in Q2 2016.

Realized cost of sales of $330 per ounce, down from $370 per ounce in Q2 2016.

Gold inventory decreased to 12,200 ounces from 25,700 ounces as of December 31, 2015.

Company indicated impairment of $95-$100 million to be recorded related to Phoenix and other assets.

After hours on Tuesday Royal Gold (NASDAQ:RGLD) reported its preliminary updates for third quarter 2016, with official release of results scheduled for April 28 before market open.

The updates came in mixed, and in my personal opinion - more to the negative side of expectations. I will review each piece in detail below.

  • Sales Update

First and foremost is the insight into company's revenues in the third quarter. The only real positive is the lower cost of sales, which paired with higher average realized sales prices implies higher gross margins - gross profit of $838 per ounce in Q3 2016 versus $724 per ounce reported in Q2 2016.

The rest of the informational bit likely bares a negative perspective. Company sold 7,300 less ounces than in Q2 2016. Comparatively, this implies RGLD to report $63.4 million in sales versus $67.4 million in Q2, or a decline of ~6% quarter-over-quarter (QoQ).

The company does not provide royalty updates, making it hard to predict the overall revenue figure. But given that in Q2 royalty made up roughly a third of overall revenue, it is likely the company will report lower total sales for March quarter on a QoQ basis.

Currently, consensus expectations are for $99.61 million in sales for March quarter which is higher than $98.1 million reported in Q2 This makes the third quarter topline miss quite likely.

  • Inventory Update

Company reported an inventory decline of 13,500 ounces compared to prior quarter figures. This is rather more of an expected and neutral news as it flows inline with company's guidance at Q2 conference call:

Now I would expect as we look ahead inventory to stay within about 5,000 ounces of that level plus or minus and as I guided in my discussion, we do expect slightly lower deliveries in the March quarter than the December quarter (S. Wenger)

The magnitude of that decline does however deviate from company's guidance. Yet, additional information for the reason of this deviation may be needed to assess whether impact is positive, negative or nonessential.

  • Asset Impairments

Lastly, the company indicated that it will record asset impairment charges associated with Phoenix stream and other non-principal properties. As a reminder, Rubicon Minerals (NYSEMKT:RBY) revised its mineral resource statement for the Phoenix Gold Project, slashing gold reserves estimations by 86%.

In response, Royal Gold initiated it's own review, and calmed the investors in its Q2 conference call, indicating Phoenix Project impact as insignificant:

We were surprised at the magnitude of this change and immediately began the process of conducting our own analysis of the mineralization. We expect to complete our review in the March quarter and we'll monitor the ongoing Rubicon sale process as we consider our carrying value of the asset. Although Rubicon only comprises less than 2% of our NAV, this development is receiving our attention.

The interesting part here is that $95-$100 million writedown is roughly ~3.25% of "net royalty and stream interests" reported in second quarter balance sheet. In other words the write down is coming above original expectations, and while still largely immaterial implies the worst case resolution of Phoenix project ordeal.

  • Summary

For current investors, I would think holding shares into earnings is reasonable, although adding protection or lightening up long positions may be wise. For new investors considering Royal Gold for their portfolio, I would suggest waiting until closer to the earnings date: I believe a more lucrative acquisition opportunity will present itself in the near term.

In the long run, it seems gold is making a bit of a come back and Royal Gold is certainly worth investing if that trend of appreciation in yellow metal continues.

Disclosure: I am/we are long RGLD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.