Royal Gold's Q1: A Nice Jump In Cash Flows
Summary
- Royal Gold recorded sales of 86,200 toz of gold equivalent in Q1 2020 (Royal Gold's financial Q3).
- The revenues climbed to $136 million and operating cash flow almost to $100 million.
- Although the impacts of the coronavirus should be more visible on Q2 results, Royal Gold should be less impacted than its main peers.
- The share price grew very quickly. There is danger of a correction.
Royal Gold (NASDAQ:RGLD) is the first (however, only by several hours) of the royalty and streaming big-three to report the Q1 2020 (Royal Gold's Q3) financial results. As expected, the numbers are very good, especially due to the high gold prices and due to the fact that the coronavirus disrupted some operations in Royal Gold's portfolio only late in March, and there was not enough time to cause any serious damage.
In Q1, Royal Gold recorded sales of 86,200 toz of gold equivalent. It represents a 3.2% growth quarter over quarter and 2.4% growth in comparison to Q1 2019. The coronavirus-related production disruptions occurred at New Gold's (NGD) Rainy River mine in Q1. The mine was suspended from March 20, until April 2. More negative impacts will be seen on the Q2 results. While the Rainy River mine restarted operations on April 2, it takes some time to ramp up back to full production. Moreover, Since April 1, Centerra Gold's (CAGDF) Mount Milligan mine, where Royal Gold owns a stream on 35% of gold and 18.75% of copper production, has been operating at reduced throughput levels. And Newmont's (NEM) Penasquito mine has been completely idled since April 12. Royal Gold owns 2% NSR on this mine that produces approximately 385,000 toz gold, 265 million lb lead, and 420 million lb zinc per year.
Source: own processing, using data of Royal Gold
Not only Royal Gold's attributable production volumes but, more importantly, also, its realized gold price increased notably in Q1. While in Q4 2019, the realized gold price averaged $1,481/toz, in Q1, it improved by 6.9%, to $1,583/toz. As a result, the revenues grew to $136.4 million, or by 10.4% compared to Q4 2019, and by 24.2% compared to Q1 2019. Also, the operating cash flow experienced a notable improvement. It grew to $99.7 million, or by 27% in comparison to the previous quarter and by 28.8% in comparison to the same period of last year. Compared to Q4, the net income declined slightly, to $38.6 million. As a result, also, the EPS declined from $0.63 to $0.59. The net income declined due to negative fair value change in equity securities ($3.8 million) and non-recurring non-cash employee stock compensations ($3.4 million). Last quarter, the non-cash compensations amounted to only $1.5 million, and the fair value changes in equity securities were a positive $0.2 million. After adjusting for these items, the adjusted net income equals $44.3 million, and the adjusted EPS equals $0.68.
Source: own processing, using data of Seeking Alpha and Royal Gold
Royal Gold's cash position improved by $13.2 million, to $93.7 million. Moreover, Royal Gold reduced its debt from $129.9 million to $100.2 million. As a result, the net debt declined to $6.5 million, and it reached its lowest level in more than two years. Although Royal Gold ended Q1 in a good financial condition, the management decided to be conservative and increase the cash buffer. Therefore, after the end of Q1, it drew $200 million on its revolving credit facility.
Source: own processing, using data of Seeking Alpha and Royal Gold
Royal Gold also announced news related to some of the assets included in its portfolio of streams and royalties. At Pueblo Viejo (Royal Gold owns 7.5% gold and 75% silver stream), Barrick Gold (GOLD) continues with its plans to expand the plant to maintain the annual gold production at the 800,000 toz level also after 2022.
Barrick also announced that total gold production at the Cortez mine (Royal Gold owns royalties ranging from 0.4% to 5%) from the regions subject to the Royal Gold's interests is expected to be approximately 175,000 toz in calendar 2020, increasing to approximately 425,000 toz between 2021 and 2026.
Another positive news came from Botswana, where the Khoemacau copper mine construction is over 43% completed. Royal Gold owns a silver stream on 80% of the silver produced at Khoemacau. The mine should be producing around 700,000 toz silver per year on average, over its 27-year mine life.
Less positive news came from Canada where the Mount Milligan mine as well as the Rainy River mine experienced a notable decline in reserve volumes.
Source: own processing
As can be seen in the chart above, although Royal Gold's share price experienced a steep growth lately, its key valuation ratios have slightly declined. The May 6 closing price stood at $126.62, resulting in a market capitalization of $8.29 billion. Given the net income, operating cash flow and revenues recorded over the last four quarters, the price-to-earnings ratio stands at 46.9, the price-to-operating cash flow ratio stands at 25.77, and the price-to-revenues ratio stands at 16.82. All of the three metrics are high. However, they are in line, or even slightly lower, compared to the values recorded over the previous quarters. 
Source: own processing
Although Royal Gold is definitely not cheap, its main peers, Franco-Nevada (FNV) and Wheaton Precious Metals (WPM), are even more expensive. All three companies released their Q1 results today, which makes the comparison easier. The main difference is in the price-to-earnings ratio, where Royal Gold stands at 46.9, while its peers stand around 150. However, in the case of Franco-Nevada and Wheaton Precious Metals, this ratio is significantly affected by non-cash impairment charges that reduce the cumulative earnings recorded over the last four quarters. Wheaton recorded an EPS of -$0.28 in Q2 2019, due to a $166 million impairment related to its Voisey's Bay cobalt stream, and Franco-Nevada recorded an EPS of -$0.52 in Q1 2020, due to a $207.4 million impairment related to its energy assets. This is why the remaining two metrics should be more appropriate. However, also in the case of the price-to-operating cash flow ratio and price-to-revenues ratio, Royal Gold is the least expensive of the three.
Royal Gold's share price was relatively stable in early Q1, however, in February, it started to decline. The decline turned into a free fall in March. The bottom was reached on March 16, at $59.78. Since this day, Royal Gold's share price increased by nearly 120%. The growth was fueled especially by the gold prices that hit a new multi-year high above $1,700/toz, and by the expectations that the gold price will keep on growing to new all-time highs. However, as can be seen in the chart, a correction would be healthy. The RSI is close to overbought levels, and the share price is too far away from its 50-day moving average. Moreover, the share price lies directly on the trend line. If the share price breaks the trend line, there is support just below $120. If this support is broken, the way for a more substantial correction will be open.
What I like about Royal Gold's Q1:
- Attributable production increased.
- Revenues and operating cash flow increased as well.
- The net debt decreased.
- The Pueblo Viejo and Cortez news sound really good.
What I don't like about Royal Gold's Q1:
- Net income declined.
- The impacts of the coronavirus will be felt in Q2 (however, Royal Gold should be less affected than its peers).
- The share price growth was too steep (yes, the growth was nice, but I'm not sure whether the current share price levels can be maintained in the near term).
This article was written by
Peter Arendas is an associate professor at the University of Economics in Bratislava. He has over 15 years of investing experience. Peter specializes in covering small and mid-cap companies in the resource sector with an in-depth insight into the precious and industrial metals royalty & streaming industry.
Peter is the leader of the investing group Learn more.Analyst’s Disclosure: I am/we are long NGD. 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.
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