Royal Gold Buys A Precious Metals Stream On New Gold's Rainy River Project - Why It's A Risky Move

Jul. 21, 2015 2:09 PM ETRoyal Gold, Inc. (RGLD)


  • Royal Gold just announced that it has purchased a gold stream on New Gold's Rainy River Project.
  • For $175 million, Royal Gold will get 6.5% of the gold produced until 230K ounces have been delivered, and 3.25% thereafter, at 25% the spot price of gold.
  • The company also gets 60% of the silver produced until 3.1 million ounces have been delivered (at 25% spot price), and 30% thereafter.
  • I think it's a high-risk, high-reward type of deal that could pay off huge for the company.

Royal Gold (NASDAQ:RGLD)

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Recent Stock Price: $52.11

Shares Outstanding: 65.21 million

Market Cap: $3.44 billion

52-Week Range: $51.89 - $82.84

Just two weeks after announcing a new gold stream on Teck's Carmen de Andacollo mine, Royal Gold announced on Monday that is has acquired a gold and silver stream on New Gold's Rainy River Project in Canada. First, I will discuss the details of the transaction before getting into whether or not I think it's a smart move by Royal Gold.

Breaking Down the Rainy River Stream

Rainy River is 100%-owned by New Gold, a $1+ billion gold and silver mining company. The project contains 3.8 million gold resources, but also 9.4 million silver ounces. The project is expected to produce 325,000 ounces of gold annually over a mine life of 14 years, at below industry average costs (less than $600 per ounce), according to New Gold's website. Environmental assessment approvals were received by New Gold in January of 2015, and first production is expected to occur by mid-2017.

Royal Gold will make an immediate upfront payment of $100 million, and $75 million once capital spending on the project is 60% completed, which is expected to occur by mid-2016.

In exchange, New Gold will deliver 6.5% of the gold produced at Rainy River until 230,000 ounces have been delivered and 3.25% thereafter, as well as 60% of the silver produced until 3.1 million ounces have been delivered and 30% thereafter. Royal Gold will pay 25% of the spot price of gold and silver as well.

What Royal Gold Could Earn

Royal Gold should net 20,000 ounces of gold and 250,000 ounces of silver annually for the first 10 years of production, according to the release. If you plug in current metals prices ($1,100 gold and $14.80 silver), you can come up

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