With a few notable exceptions, gold producers have not have had an easy time riding out this prolonged trough of weak prices and unfavourable investor sentiment. Perhaps that’s why more attention is being paid to the few companies fortunate enough to take their cut right off the top in the form of gold royalties. Even a small, quality royalty can have a major impact on the company’s income stream and balance sheet.
Mining analysts Brian Christie and Johann Aler of Canaccord Capital recently issued a buy recommendation for
“Although generally recognized by investors in the United States and Europe, Royal Gold has been, until recently, an untold story in the Canadian market place,” the analysts note in their research report. “We believe that the company is well on the way to becoming a significant precious metal royalty company.”
Christie and Aler stress that the current royalties are on long-life mines with cash costs generally at the lower end of the spectrum. “As such, Royal Gold has virtually no operational risk. In addition, the company is unhedged, which means that there is no margin risk.”
Royal Gold has 17.2 million shares outstanding (17.5 million fully diluted), with about 30% held by management. While the company currently trades at around US$3.50, Christie and Aler have set a 12-month target price of US$5.50.
The analysts note that the royalties are expected to generate revenues of US$8.2 million at a gold price of US$310 for the fiscal year ended June 30, 2000, and US$8.8 million in fiscal 2001.
“Royal Gold has far more leverage to the price of gold than other gold royalty companies since its main royalty on Pipeline has sliding scales based on the price of gold. Its fixed royalties provide investors with solid downside protection.”
The existing Pipeline complex — a conventional open-pit mine that employs milling and heap-leach processing — is owned jointly by
“With reserves and resources in excess of 9.7 million ounces of gold, and cash costs of less than US$50 per oz., the Pipeline gold complex is clearly a world-class asset,” Christie and Aler state. “Over the years ahead, this asset should provide Royal Gold with a strong royalty revenue base from which to expand.”
About a year ago, Royal Gold converted its 20% net profits interest on South Pipeline into two sliding-scale royalties (GSR1 and GSR2) that extend over the entire mining complex, which includes the Pipeline and South Pipeline deposits and related properties.
“Since South Pipeline is not expected to start production until 2002,” the analysts state, “this new royalty structure generates significant revenues and cash flows to Royal Gold about three years earlier than expected. As a condition of the deal, Royal Gold agreed to surrender its right to operate the South Pipeline deposit.”
The GSR1 royalty covers the current mine footprint, whereas GSR2 covers new reserves that are on the claim block lying outside the current mine footprint. “The GSR2 royalty pays out at a rate that is 80% higher than that of GSR1,” Christie and Aler note.
Last summer, Royal Gold bought a variable-scale gross smelter return royalty (GSR3) on the Pipeline complex at a cost of US$8.25 million. It covers the same area defined by the two other royalties and initially pays out at a rate of 0.48% of the value of the next 1.6 million oz. to be produced from the complex. Subsequent production is subject to a rate of 0.71%.
Exploration is continuing at the Pipeline land package, which is on the Battle Mountain/Eureka trend. Christie and Aler note that near-surface mineralization has been discovered east and south of the South Pipeline deposit and that exploration drilling has identified more mineralization to the southeast. “Further drilling is being conducted on the Deep zone, located beneath Pipeline and South Pipeline,” they add.
Royal Gold also holds a 1.75% net smelter return royalty (NSR) on about 81% of the nearby Bald Mountain gold mine — an open-pit, heap-leach operation owned by Placer Dome. Proven and probable reserves covered by the royalty stand at about 10.8 million tonnes grading 0.075 oz. gold, plus 10.9 million tonnes of mineralized material grading 0.037 oz. On a yearly basis, the mine produces about 110,000 oz. at a cash cost of US$189 per oz.
The company has other royalties in Nevada, including a 5% NSR on a portion of
Farther afield, Royal Gold recently agreed to buy a 2% NSR on all mineral production from
Yamana plans to be pulling ore from the Martha mine by early 2001, with 4 million oz. silver-equivalent projected for the first year of production. “We estimate that this royalty will generate in excess of US$400,000 in revenue for Royal Gold in the 2001-2002 fiscal year,” the Canaccord analysts state. “With its extensive land holdings, Yamana is well-positioned to make a significant new discovery in the district, from which Royal Gold will ultimately benefit.”
Royal Gold also holds a portfolio of exploration targets, including the Milos gold property in Greece, the Alligator Ridge project in Nevada, and the Inyo gold project in California.
“Aside from commodity risk,” the analysts conclude, “the only negative factors we see with regard to an investment in Royal Gold are that the stock is relatively illiquid, especially on the TSE, and [that it] is considered foreign property for Canadian investors.”
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