Royal arranges royalty conversion

Royal Gold (RGLD-Q) has converted its 20% net profits interest in Nevada’s South Pipeline deposit into a gross smelter royalty on both that and the main Pipeline deposits.

Situated in the state’s central region, the Pipeline complex is operated by Cortez Gold Mines, a 60-40 joint venture between Placer Dome (PDG-N) and Kennecott Exploration, a subsidiary of London-based Rio Tinto (RTP-N).

Royal Gold arranged the conversion rather than wait for the South Pipeline to be developed, in which case it would not have received any income until after startup, which is scheduled for 2002.

The conversion is designed to give Royal immediate cashflow and protection from rising costs at the operation.

Royal will receive a sliding-scale gross smelter royalty on all gold produced on the 55-claim property. The royalty has a floor of 0.4% at gold prices lower than US$210 per oz. and a cap at 5% for gold above US$470 per oz. At current prices, the royalty stands at 2.25%.

Cortez expects Pipeline to crank out 1.1 million oz. in 1999, dropping to 850,000 oz. in 2000 and 2001. Reserves are pegged at 173 million tons grading 0.048 oz. per ton, equivalent to 8.3 million oz.

In addition, the company will receive a 7% gross smelter royalty on all silver produced at Pipeline, plus a sliding-scale gross smelter royalty on the 279-claim GAS block. The GAS royalty, also tied to gold, has a floor of 0.72% and a cap of 9%. At current prices, it stands at 4.05%.

Royal also will receive a 10% gross smelter royalty on gold and silver produced from stockpiled material pulled from the Crescent pit area.

The royalty agreement guarantees net earnings for Royal Gold for the fiscal year ending June 30, 2000.