ROYAL GOLD INC - Quarter Report: 2011 September (Form 10-Q)

Table of Contents

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 2011

 

or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                  to                  

 

Commission File Number: 001-13357

 

 

Royal Gold, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Registrant’s telephone number, including area code (303) 573-1660

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes   x   No   o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  x    No   o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

 

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes   o   No   x

 

There were 54,765,490 shares of the Company’s common stock, par value $0.01 per share, outstanding as of October 27, 2011.  In addition, as of such date, there were 814,555 exchangeable shares of RG Exchangeco Inc. outstanding which are exchangeable at any time into shares of the Company’s common stock on a one-for-one basis and entitle their holders to dividend and other rights economically equivalent to those of the Company’s common stock.

 

 

Table of Contents

 

INDEX

 

		PAGE
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations and Comprehensive Income	4
	Consolidated Statements of Cash Flows	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24
Item 4.	Controls and Procedures	24
PART II	OTHER INFORMATION	25
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults Upon Senior Securities	25
Item 4.	Removed and Reserved	26
Item 5.	Other Information	26
Item 6.	Exhibits	26
SIGNATURES		26

 

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ROYAL GOLD, INC.

Consolidated Balance Sheets

(Unaudited, in thousands except share data)

 

		September 30,			June 30,
		2011			2011
ASSETS
Cash and equivalents		$	123,401		$	114,155
Royalty receivables		54,778			48,828
Prepaid expenses and other current assets		6,343			6,290
Total current assets		184,522			169,273
Royalty interests in mineral properties, net (Note 2)		1,671,943			1,690,439
Available for sale securities (Note 3)		23,528			28,876
Other assets		12,486			14,114
Total assets		$	1,892,479		$	1,902,702
LIABILITIES
Current portion of long-term debt (Note 4)		$	15,600		$	15,600
Accounts payable		2,224			2,499
Dividends payable		6,112			6,093
Income tax payable		8,870			676
Other current liabilities		3,204			3,993
Total current liabilities		36,010			28,861
Long-term debt (Note 4)		176,600			210,500
Net deferred tax liabilities		153,028			152,564
Uncertain tax positions		19,140			18,836
Other long-term liabilities		4,015			4,246
Total liabilities		388,793			415,007
Commitments and contingencies (Note 11)
EQUITY
Preferred stock, $.01 par value, 10,000,000 shares authorized; and 0 shares issued		—			—
Common stock, $.01 par value, 100,000,000 shares authorized; and 54,450,165 and 54,231,787 shares outstanding, respectively		545			543
Exchangeable shares, no par value, 1,806,649 shares issued, less 992,094 and 900,854 redeemed shares, respectively		35,849			39,864
Additional paid-in capital		1,330,012			1,319,697
Accumulated other comprehensive (loss) income		(5,250		)	54
Accumulated earnings		116,385			100,004
Total Royal Gold stockholders’ equity		1,477,541			1,460,162
Non-controlling interests		26,145			27,533
Total equity		1,503,686			1,487,695
Total liabilities and equity		$	1,892,479		$	1,902,702

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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ROYAL GOLD, INC.

Consolidated Statements of Operations and Comprehensive Income

(Unaudited, in thousands except share data)

 

		For The Three Months Ended
		September 30,			September 30,
		2011			2010
Royalty revenues		$	64,465		$	45,338
Costs and expenses
General and administrative		6,298			5,045
Production taxes		2,150			558
Depreciation, depletion and amortization		17,221			18,925
Restructuring on royalty interests in mineral properties		1,328			—
Total costs and expenses		26,997			24,528
Operating income		37,468			20,810
Interest and other income		2,833			1,424
Interest and other expense		(1,779		)	(2,305		)
Income before income taxes		38,522			19,929
Income tax expense		(12,381		)	(6,927		)
Net income		26,141			13,002
Net income attributable to non-controlling interests		(3,646		)	(1,171		)
Net income attributable to Royal Gold stockholders		$	22,495		$	11,831
Net income		$	26,141		$	13,002
Adjustments to comprehensive income, net of tax
Unrealized change in market value of available for sale securities		(5,304		)	7
Comprehensive income		20,837			13,009
Comprehensive income attributable to non-controlling interests		(3,646		)	(1,171		)
Comprehensive income attributable to Royal Gold stockholders		$	17,191		$	11,838
Net income per share available to Royal Gold common stockholders:
Basic earnings per share		$	0.41		$	0.22
Basic weighted average shares outstanding		55,183,719			54,986,700
Diluted earnings per share		$	0.40		$	0.21
Diluted weighted average shares outstanding		55,491,354			55,250,028
Cash dividends declared per common share		$	0.11		$	0.09

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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ROYAL GOLD, INC.

Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 

		For The Three Months Ended
		September 30,			September 30,
		2011			2010
Cash flows from operating activities:
Net income		$	26,141		$	13,002
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization		17,221			18,925
Gain on distribution to non-controlling interest		(3,018		)	(912		)
Non-cash stock-based compensation expense		2,198			1,285
Tax benefit of stock-based compensation exercises		(1,567		)	(521		)
Restructuring on royalty interests in mineral properties		1,328			—
Deferred tax expense (benefit)		508			(521		)
Changes in assets and liabilities:
Royalty receivables		(5,950		)	(2,678		)
Prepaid expenses and other assets		197			1,421
Accounts payable		70			409
Income taxes payable		9,762			4,887
Other liabilities		(716		)	(1,063		)
Net cash provided by operating activities		$	46,174		$	34,234
Cash flows from investing activities:
Acquisition of royalty interests in mineral properties		—			(25,000		)
Proceeds on sale of Inventory - restricted		4,455			1,471
Deferred acquisition costs		—			(695		)
Other		(111		)	(33		)
Net cash provided by (used in) investing activities		$	4,344		$	(24,257	)
Cash flows from financing activities:
Repayment of debt		(33,900		)	(6,500		)
Common stock dividends		(6,095		)	(4,973		)
Distribution to non-controlling interests		(5,380		)	(1,971		)
Proceeds from the issuance of common stock		2,536			—
Tax benefit of stock-based compensation exercises		1,567			521
Other		—			(397		)
Net cash (used in) financing activities		$	(41,272	)	$	(13,320	)
Net increase (decrease) in cash and equivalents		9,246			(3,343		)
Cash and equivalents at beginning of period		114,155			324,846
Cash and equivalents at end of period		$	123,401		$	321,503

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

1.                                      OPERATIONS, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

Operations

 

Royal Gold, Inc. (“Royal Gold”, the “Company”, “we”, “us”, or “our”), together with its subsidiaries, is engaged in the business of acquiring and managing precious metals royalties and similar interests.  Royalties are passive (non-operating) interests in mining projects that provide the right to revenue or production from the project after deducting specified costs, if any.

 

Summary of Significant Accounting Policies

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934, as amended.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for annual financial statements.  In the opinion of management, all adjustments which are of a normal recurring nature considered necessary for a fair presentation of our interim financial statements have been included in this Form 10-Q.  Operating results for the three months ended September 30, 2011, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2012.  These interim unaudited financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2011, filed with the Securities and Exchange Commission on August 18, 2011 (“Fiscal 2011 10-K”).

 

Reclassification

 

Costs and expenses previously classified as Exploration and business development are now included within the General and administrative caption.  Further, certain amounts previously classified as Costs of Operations are now included within the General and administrative caption or the Production taxes caption in the Company’s consolidated statements of operations and comprehensive income.  The following table reflects these reclassifications for the three months ended September 30, 2010:

 

		Previously
		Reported			Reclass			Adjusted
		Balance			Adjustment			Balance
Costs and expenses (in thousands):
Costs of operations		$	1,192		$	(1,192	)	$	—
General and administrative		3,724			1,321			5,045
Production taxes		—			558			558
Exploration and business development		687			(687		)	—

 

These reclassifications had no effect on reported operating income or net income attributable to Royal Gold stockholders for the prior period presented.

 

Recently Issued Accounting Standards

 

In June 2011, the Financial Accounting Standards Board issued ASU No. 2011-05, Presentation of Comprehensive Income.  The ASU addresses the presentation of comprehensive income and provides entities with the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. 

 

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

The provisions of this ASU are effective for the Company’s quarter beginning July 1, 2012.  Since this ASU addresses financial presentation only, its adoption will not impact the Company’s consolidated position or results of operations.

 

2.             ROYALTY INTERESTS IN MINERAL PROPERTIES

 

The following summarizes the Company’s royalty interests in mineral properties as of September 30, 2011 and June 30, 2011.

 

As of September 30, 2011 (Amounts in thousands):		Cost			Restructuring			Accumulated Depletion			Net
Production stage royalty interests:
Andacollo		$	272,998		$	—		$	(17,065	)	$	255,933
Voisey’s Bay		150,138			—			(18,505		)	131,633
Peñasquito		99,172			—			(6,209		)	92,963
Las Cruces		57,230			—			(3,318		)	53,912
Mulatos		48,092			—			(14,986		)	33,106
Wolverine		45,158			—			(260		)	44,898
Dolores		44,878			—			(4,500		)	40,378
Canadian Malartic		38,800			—			(999		)	37,801
Gwalia Deeps		28,119			—			(2,270		)	25,849
Holt		25,428			—			(1,115		)	24,313
Inata		24,871			—			(5,892		)	18,979
Leeville		18,322			—			(13,372		)	4,950
Robinson		17,825			—			(9,119		)	8,706
Cortez		10,630			—			(9,637		)	993
Other		178,144			—			(101,668		)	76,476
		1,059,805			—			(208,915		)	850,890
Development stage royalty interests:
Pascua-Lama		372,105			—			—			372,105
Mt. Milligan		227,596			—			—			227,596
Other (Note 6)		26,251			(1,328		)	—			24,923
		625,952			(1,328		)	—			624,624
Exploration stage royalty interests		196,429			—			—			196,429
Total royalty interests in mineral properties		$	1,882,186		$	(1,328	)	$	(208,915	)	$	1,671,943

 

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

As of June 30, 2011 (Amounts in thousands):		Cost			Accumulated Depletion			Net
Production stage royalty interests:
Andacollo		$	272,998		$	(13,076	)	$	259,922
Voisey’s Bay		150,138			(15,526		)	134,612
Peñasquito		99,172			(5,457		)	93,715
Las Cruces		57,230			(2,615		)	54,615
Mulatos		48,092			(14,199		)	33,893
Dolores		44,878			(4,005		)	40,873
Wolverine		45,158			(257		)	44,901
Canadian Malartic		38,800			(367		)	38,433
Holt		25,428			(620		)	24,808
Inata		24,871			(5,158		)	19,713
Gwalia Deeps		22,854			(1,715		)	21,139
Leeville		18,322			(12,920		)	5,402
Robinson		17,825			(8,827		)	8,998
Cortez		10,630			(9,619		)	1,011
Other		178,143			(97,386		)	80,757
		1,054,539			(191,747		)	862,792
Development stage royalty interests:
Pascua-Lama		372,105			—			372,105
Mt. Milligan		227,596			—			227,596
Other		26,250			—			26,250
		625,951			—			625,951
Exploration stage royalty interests		201,696			—			201,696
Total royalty interests in mineral properties		$	1,882,186		$	(191,747	)	$	1,690,439

 

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

3.             AVAILABLE FOR SALE SECURITIES

 

The Company’s available for sale securities as of September 30, 2011 and June 30, 2011 consists of the following:

 

		As of September 30, 2011
		(Amounts in thousands)
					Unrealized
		Cost Basis			Gain			Loss			Fair Value
Non-current:
Seabridge Gold, Inc.		$	28,574		—			(5,243		)	$	23,331
Other		203			—			(6		)	197
		$	28,777		$	—		$	(5,249	)	$	23,528

 

		As of June 30, 2011
		(Amounts in thousands)
					Unrealized
		Cost Basis			Gain			Loss			Fair Value
Non-current:
Seabridge Gold, Inc.		$	28,574		—			(28		)	$	28,546
Other		203			127			—			$	330
		$	28,777		$	127		$	(28	)	$	28,876

 

4.             DEBT

 

The Company’s current and non-current debt as of September 30, 2011 and June 30, 2011 consists of the following:

 

		As of September 30, 2011 (Amounts in thousands)						As of June 30, 2011 (Amounts in thousands)
		Current			Non-current			Current			Non-current
Credit facility		$	—		$	70,000		$	—		$	100,000
Term loan		15,600			106,600			15,600			110,500
Total debt		$	15,600		$	176,600		$	15,600		$	210,500

 

As discussed in the Company’s Fiscal 2011 10-K, the Company has financial covenants associated with its revolving credit facility and term loan.  At September 30, 2011, the Company was in compliance with each financial covenant.

 

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

5.             STOCK-BASED COMPENSATION

 

The Company recognized stock-based compensation expense as follows:

 

		For The Three Months Ended
		September 30,			September 30,
		2011			2010
		(Amounts in thousands)
Stock options		$	115		$	131
Stock appreciation rights		295			167
Restricted stock		1,086			470
Performance stock		702			517
Total stock-based compensation expense		$	2,198		$	1,285

 

Stock-based compensation expense is included within general and administrative in the consolidated statements of operations and comprehensive income.

 

There were 18,796 and 0 stock options granted during the three months ended September 30, 2011 and 2010, respectively.  As of September 30, 2011, there was $0.9 million of unrecognized compensation expense related to non-vested stock options, which is expected to be recognized over a weighted-average period of 2.3 years.

 

There were 42,804 and 0 stock-settled stock appreciation rights granted during the three months ended September 30, 2011 and 2010, respectively.  As of September 30, 2011, there was $2.2 million of unrecognized compensation expense related to non-vested stock appreciation rights, which is expected to be recognized over a weighted-average period of 2.1 years.

 

There were 44,950 and 0 shares of restricted stock granted during the three months ended September 30, 2011 and 2010, respectively.  As of September 30, 2011, there was $7.3 million of unrecognized compensation expense related to non-vested restricted stock, which is expected to be recognized over a weighted-average vesting period of 4.0 years.

 

There were 49,600 and 0 shares of performance stock granted during the three months ended September 30, 2011 and 2010, respectively.  During the three months ended September 30, 2011 and 2010, 0 and 74,500 shares of performance stock, respectively, vested at a weighted average grant date fair market value of $0 and $42.53, respectively.  As of September 30, 2011, there was $3.7 million of unrecognized compensation expense related to non-vested performance stock, which is expected to be recognized over a weighted-average vesting period of 0.9 years.

 

6.             RESTRUCTURING ON ROYALTY INTERESTS IN MINERAL PROPERTIES

 

The Company owns a net smelter return royalty on the Relief Canyon property located in Nevada.  From November 2010 to October 2011, the Company has been involved in managing this interest in bankruptcy proceedings of the owner of the Relief Canyon project.  On August 24, 2011, the Company entered into an Amended and Restated Net Smelter Return Royalty Agreement with the property owner, pursuant to which the royalty rate was reduced from 4% to 2%, and the ten mile area of interest was eliminated.  The Company elected to amend the royalty agreement in order to enhance project economics and the probability of recognizing royalty revenue.  As a result of the amendment to the Relief Canyon royalty agreement, the Company recorded a restructuring charge of approximately $1.3 million during the quarter ended September 30, 2011, which was based on the Company’s estimate of fair value.  The Company’s carrying value for the Relief Canyon royalty interest was approximately $1.2 million as of September 30, 2011.

 

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

7.             EARNINGS PER SHARE (“EPS”)

 

Basic earnings per common share were computed using the weighted average number of shares of common stock outstanding during the period, considering the effect of participating securities.  Unvested stock-based compensation awards that contain non-forfeitable rights to dividends or dividend equivalents are considered participating securities and are included in the computation of earnings per share pursuant to the two-class method.  The Company’s unvested restricted stock awards contain non-forfeitable dividend rights and participate equally with common stock with respect to dividends issued or declared.  The Company’s unexercised stock options, unexercised SARs and unvested performance stock do not contain rights to dividends.  Under the two-class method, the earnings used to determine basic earnings per common share are reduced by an amount allocated to participating securities.  Use of the two-class method has an immaterial impact on the calculation of basic and diluted earnings per common share.

 

The following tables summarize the effects of dilutive securities on diluted EPS for the period:

 

		For The Three Months Ended
		September 30,			September 30,
		2011			2010
		(in thousands, except share data)
Net income available to Royal Gold common stockholders		$	22,495		$	11,831
Weighted-average shares for basic EPS		55,183,719			54,986,700
Effect of other dilutive securities		307,635			263,328
Weighted-average shares for diluted EPS		55,491,354			55,250,028
Basic earnings per share		$	0.41		$	0.22
Diluted earnings per share		$	0.40		$	0.21

 

Our calculation of weighted average shares includes all of our outstanding stock: common stock and exchangeable shares.  Exchangeable shares are the equivalent of common shares in that they have the same dividend rights and share equitably in undistributed earnings and are exchangeable on a one-for-one basis for shares of our common stock.

 

8.             INCOME TAXES

 

		For The Three Months Ended
		September 30,			September 30,
		2011			2010
		(Amounts in thousands, except rate)
Income tax expense		$	12,381		$	6,927
Effective tax rate		32.1		%	34.8		%

 

The decrease in the effective tax rate for September 30, 2011 is primarily related to (i) the decrease in tax expense from changes in estimates of uncertain tax positions, and (ii) the decrease in tax expense relating to the decrease in unrealized foreign exchange gains.

 

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. Federal, state and local, and non-U.S. income tax examinations by tax authorities for fiscal years before 2007.

 

As of September 30, 2011 and June 30, 2011, the Company had $19.1 million and $18.8 million of total gross unrecognized tax benefits, respectively.  The increase in gross unrecognized tax benefits was primarily related to tax positions of International Royalty Corporation entities taken prior to or upon the acquisition by the Company during fiscal year 2010.  These increases were offset by a decrease in the unrecognized tax benefits as a result of statute of limitations expiring during the quarter.  If recognized, these unrecognized tax benefits would impact the Company’s effective income tax rate.

 

The Company’s continuing practice is to recognize potential interest and/or penalties related to unrecognized tax benefits as part of its income tax expense. At September 30, 2011 and June 30, 2011, the amount of accrued income-tax-related interest and penalties was $1.6 million and $1.5 million, respectively.

 

9.             SEGMENT INFORMATION

 

The Company manages its business under a single operating segment, consisting of royalty acquisition and management activities.  Royal Gold’s royalty revenue and long-lived assets (royalty interests in mineral properties, net) are geographically distributed as shown in the following table.

 

		Royalty Revenue				Royalty Interests in Mineral Property, net
		Three Months Ended
		September 30,				As of		As of
		2011		2010		September 30, 2011		June 30, 2011
Chile		27	%	19	%	40	%	40	%
United States		24	%	26	%	3	%	3	%
Canada		20	%	9	%	36	%	36	%
Mexico		17	%	13	%	11	%	11	%
Australia		6	%	7	%	4	%	5	%
Africa		4	%	23	%	2	%	2	%
Other		2	%	3	%	4	%	3	%

 

10.          FAIR VALUE MEASUREMENTS

 

FASB ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy under FASB ASC 820 are described below:

 

Level 1:      Quoted prices for identical instruments in active markets;

 

Level 2:      Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and

 

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

Level 3:      Prices or valuation techniques requiring inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

The following table sets forth the Company’s financial assets measured at fair value on a recurring basis (at least annually) by level within the fair value hierarchy.

 

		Fair Value at September 30, 2011
		(In thousands)
		Total			Level 1			Level 2			Level 3
Assets:
Money market investments(1)		$	284		$	284		$	—		$	—
Marketable equity securities(2)		23,528			23,528			—			—
		$	23,812		$	23,812		$	—		$	—

 

(1)  Included in Cash and equivalents in the Company’s consolidated balance sheets.

(2)  Included in Available for sale securities in the Company’s consolidated balance sheets.

 

The carrying amount of our long-term debt (including the current portion) approximates fair value as of September 30, 2011.

 

The Company invests in money market funds, which are traded by dealers or brokers in active over-the-counter markets.  The Company’s money market funds, which are invested in United States treasury bills or United States treasury backed securities, are classified within Level 1 of the fair value hierarchy.

 

The Company’s marketable equity securities classified within Level 1 of the fair value hierarchy are valued using quoted market prices in active markets.  The fair value of the Level 1 marketable equity securities is calculated as the quoted market price of the marketable equity security multiplied by the quantity of shares held by the Company.

 

As of September 30, 2011, the Company also had assets that, under certain conditions, are subject to measurement at fair value on a non-recurring basis like those associated with royalty interests in mineral properties, intangible assets and other long-lived assets.  For these assets, measurement at fair value in periods subsequent to their initial recognition are applicable if any of these assets are determined to be impaired; however, no triggering events have occurred relative to any of these assets during the three months ended September 30, 2011.  If recognition of these assets at their fair value becomes necessary, such measurements will be determined utilizing Level 3 inputs.

 

11.          COMMITMENTS AND CONTINGENCIES

 

Mt. Milligan Gold Stream Acquisition

 

As discussed in more detail in the Company’s Fiscal 2011 10-K, on October 20, 2010, the Company entered into a Purchase and Sale Agreement (the “Purchase and Sale Agreement”) pursuant to which a wholly-owned subsidiary of the Company, RGLD Gold AG, acquired the right to 25% of the payable gold produced from the Mt. Milligan copper-gold project in British Columbia (the “Gold Purchase Transaction”) from Terrane Metals Corp. (“Terrane”), a wholly-owned subsidiary of Thompson Creek Metals Company Inc. (“Thompson Creek”).  Pursuant to the Purchase and Sale Agreement, RGLD Gold AG paid $226.5 million at the closing of the Gold Purchase Transaction.  In the future, upon satisfaction of certain conditions set forth in the Purchase and Sale Agreement, RGLD Gold AG will make additional payments (each, an “Additional Payment”) to Terrane in an amount not to exceed $85 million in the

 

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

aggregate to fund a portion of the development costs of the Mt. Milligan project.  The Company did not make any Additional Payments to Thompson Creek during the three months ended September 30, 2011.  On October 13, 2011, the Company made a $13.7 million Additional Payment to Thompson Creek, resulting in a remaining commitment of $71.3 million as of that date.

 

Voisey’s Bay

 

The Company owns a royalty on the Voisey’s Bay mine in Newfoundland and Labrador owned by Vale Newfoundland & Labrador Limited (“VNL”).  The royalty is owned by the Labrador Nickel Royalty Limited Partnership (“LNRLP”), in which the Company’s wholly-owned indirect subsidiary, Canadian Minerals Partnership, is the general partner and 89.99% owner.  The remaining interests in LNRLP are owned by Altius Investments Ltd. (10%), a company unrelated to Royal Gold, and the Company’s wholly-owned indirect subsidiary, Voisey’s Bay Holding Corporation (0.01%).

 

On October 16, 2009, LNRLP filed a claim in the Supreme Court of Newfoundland and Labrador Trial Division against Vale Inco Limited (“Vale Inco”) and its wholly-owned subsidiaries, Vale Inco Atlantic Sales Limited (“VIASL”) and VNL, related to calculation of the NSR on the sale of concentrates, including nickel concentrates, from the Voisey’s Bay mine to Vale Inco.  The claim asserts that Vale Inco is incorrectly calculating the NSR and requests an order in respect of the correct calculation of future payments.  The claim also requests specific damages for underpayment of past royalties to the date of the claim in an amount not less than $29 million, together with additional damages until the date of trial, interest, costs and other damages.  The litigation is in the discovery phase.

 

12.          RELATED PARTY

 

Crescent Valley Partners, L.P. (“CVP”) was formed as a limited partnership in April 1992.  It owns a 1.25% net value royalty (“NVR1”) on production of minerals from a portion of Cortez.  Denver Mining Finance Company (“DMFC”), our wholly-owned subsidiary, is the general partner and holds a 2.0% interest in CVP.  In addition, Royal Gold holds a 29.6% limited partner interest in the partnership, while our Chairman of the Board of Directors, the Chairman of our Audit Committee and one other member of our board of directors hold an aggregate 35.56% limited partner interest.  The general partner performs administrative services for CVP in receiving and processing the royalty payments from the operator, including the disbursement of royalty payments and record keeping for in-kind distributions to the limited partners.

 

CVP receives its royalty from the Cortez Joint Venture in-kind.  The Company, as well as certain other limited partners, sell their pro-rata shares of such gold immediately and receive distributions in cash, while CVP holds gold for certain other limited partners.  Such gold inventories, which totaled 12,735 and 15,255 ounces of gold as of September 30, 2011 and June 30, 2011, respectively, are held by a third party refinery in Utah for the account of the limited partners of CVP.  The inventories are carried at historical cost and are classified within Other assets on the Company’s consolidated balance sheets.  The carrying value of the gold in inventory was approximately $6.9 million and $8.1 million as of September 30, 2011 and June 30, 2011, respectively, while the fair value of such ounces was approximately $20.6 million and $23.0 million as of September 30, 2011 and June 30 2011, respectively.  None of the gold currently held in inventory as of September 30, 2011 and June 30, 2011, is attributed to Royal Gold, as the gold allocated to Royal Gold’s CVP partnership interest is typically sold within five days of receipt.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

General

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide information to assist you in better understanding and evaluating our financial condition and results of operations.  We recommend that you read this MD&A in conjunction with our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the fiscal year ended June 30, 2011, filed with the Securities and Exchange Commission (the “SEC”) on August 18, 2011 (the “Fiscal 2011 10-K”).

 

This MD&A contains forward-looking information.  You should review our important note about forward-looking statements following this MD&A.

 

We refer to “GSR,” “NSR,” and other types of royalty interests throughout this MD&A.  These terms are defined in our Fiscal 2011 10-K.

 

Overview

 

Royal Gold, together with its subsidiaries, is engaged in the business of acquiring and managing precious metals royalties and similar interests.  Royalties are passive (non-operating) interests in mining projects that provide the right to revenue or production from the project after deducting specified costs, if any.  We seek to acquire existing royalties or to finance projects that are in production or in development stage in exchange for royalties or similar interests.  We are engaged in a continual review of opportunities to acquire existing royalties, to create new royalties or similar interests through the financing of mine development or exploration, or to acquire companies that hold royalties. We currently, and generally at any time, have acquisition opportunities in various stages of active review, including, for example, our engagement of consultants and advisors to analyze particular opportunities, analysis of technical, financial and other confidential information, submission of indications of interest, participation in preliminary discussions and involvement as a bidder in competitive auctions.

 

As of September 30, 2011, the Company owns royalties on 37 producing properties, 22 development stage properties and 127 exploration stage properties, of which the Company considers 39 to be evaluation stage projects.  The Company uses “evaluation stage” to describe exploration stage properties that contain mineralized material and on which operators are engaged in the search for reserves.  We do not conduct mining operations nor are we required to contribute to capital costs (except as contractually obligated to as part of the Mt. Milligan gold stream transaction), exploration costs, environmental costs or other mining costs on the properties in which we hold royalty interests.  During the three months ended September 30, 2011, we focused on the management of our existing royalty and similar interests and the acquisition of royalty and similar interests.

 

Our financial results are primarily tied to the price of gold, silver, copper, nickel and other metals, as well as production from our producing stage royalty interests.  The price of gold, silver, copper, nickel and other metals have fluctuated widely in recent years.  The marketability and the price of gold, silver, copper, nickel and other metals are influenced by numerous factors beyond the control of the Company and may have a material and adverse effect on the Company’s results of operations and financial condition.

 

For the three months ended September 30, 2011 and 2010, gold, silver, copper and nickel price averages and percentage of royalty revenues by metal were as follows:

 

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		Three months ended
		September 30, 2011					September 30, 2010
Metal		Average Price			Percentage of Royalty Revenue		Average Price			Percentage of Royalty Revenue
Gold ($/ounce)		$	1,702		70%		$	1,227		73%
Silver ($/ounce)		$	38.80		6%		$	18.97		4%
Copper ($/pound)		$	4.07		11%		$	3.29		9%
Nickel ($/pound)		$	10.00		9%		$	9.61		9%
Other		N/A			4%		N/A			5%

 

Principal Royalties

 

Our principal producing and development royalty interests are shown in the following tables (listed alphabetically).  The Company considers both historical and future potential revenues in determining which royalties in our portfolio are principal to our business.  Estimated future potential royalty revenues from both producing and development properties are based on a number of factors, including reserves subject to our royalty interests, production estimates, feasibility studies, metal price assumptions, mine life, legal status and other factors and assumptions, any of which could change and could cause Royal Gold to conclude that one or more of such royalties is no longer principal to our business.

 

Please refer to our Fiscal 2011 10-K for further discussion of our principal producing and development royalty interests.

 

Producing Properties

 

						Royalty
Mine		Location		Operator		(Gold unless otherwise stated)
Andacollo		Region IV, Chile		Compañía Minera Teck Carmen de Andacollo (“Teck”)		75% of gold produced (until 910,000 payable ounces; 50% thereafter)
Canadian Malartic		Quebec, Canada		Osisko Mining Corporation (“Osisko”)		1.0% to 1.5% sliding-scale NSR
Cortez		Nevada, USA		Barrick Gold Corporation (“Barrick”)		GSR1: 0.40% to 5.0% sliding-scale GSR
						GSR2: 0.40% to 5.0% sliding-scale GSR
						GSR3: 0.71% GSR
						NVR1: 0.39% NVR
Dolores		Chihuahua, Mexico		Minefinders Corporation, Ltd. (“Minefinders”)		3.25% NSR; 2.0% NSR (silver)
Holt		Ontario, Canada		St Andrew Goldfields Ltd. (“St Andrew”)		0.00013 x quarterly average gold price NSR
Las Cruces		Andalucía, Spain		Inmet Mining Corporation (“Inmet”)		1.5% NSR (copper)
Leeville		Nevada, USA		Newmont Mining Corporation (“Newmont”)		1.8% NSR
Mulatos(1)		Sonora, Mexico		Alamos Gold, Inc. (“Alamos”)		1.0% to 5.0% sliding-scale NSR
Peñasquito		Zacatecas, Mexico		Goldcorp Inc. (“Goldcorp”)		2.0% NSR (gold, silver, lead, zinc)
Robinson		Nevada, USA		Quadra FNX Mining Ltd. (“Quadra”)		3.0% NSR (copper, gold, silver, molybdenum)
Voisey’s Bay		Newfoundland and Labrador, Canada		Vale		2.7% NSR (nickel, copper, cobalt)
Wolverine		Yukon Territory, Canada		Yukon Zinc Corporation (“Yukon Zinc”)		0.00% to 9.45% sliding-scale NSR (gold and silver)

 

(1)             The Mulatos royalty is capped at 2.0 million gold ounces of production.  Approximately 761,000 cumulative ounces of gold have been produced as of September 30, 2011.

 

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Development Properties

 

						Royalty or similar interests
Mine		Location		Operator		(Gold unless otherwise stated)
Mt. Milligan		British Columbia, Canada		Thompson Creek Metals Inc. (“Thompson Creek”)		25% of the payable gold(1)
Pascua-Lama		Region III, Chile		Barrick		0.78% to 5.23% sliding-scale NSR
						1.05% fixed rate royalty (copper)

 

(1)             25% of payable gold with a fixed cost of $400 per ounce until 550,000 ounces are delivered to Royal Gold; $450 thereafter.

 

Operators’ Production Estimates by Royalty for Calendar 2011

 

We received annual production estimates from the operators of our producing mines during the first calendar quarter of 2011.  The following table shows such production estimates for our principal producing properties for calendar 2011 as well as the actual production reported to us by the various operators through September 30, 2011.  The estimates and production reports are prepared by the operators of the mining properties.  We do not participate in the preparation or calculation of the operators’ estimates or production reports and have not independently assessed or verified the accuracy of such information.  Please refer to “Recent Developments, Property Developments” below within this MD&A for further discussion on any updates at our principal producing or development properties.

 

Operators’ Production Estimate by Royalty for Calendar 2011 and Reported Production

Principal Producing Properties

For the period January 1, 2011 through September 30, 2011

 

		Calendar 2011 Operator’s Production						Reported Production through
		Estimate(1)						September 30, 2011(2)
		Gold		Silver		Base Metals		Gold		Silver		Base Metals
Royalty		(oz.)		(oz.)		(lbs.)		(oz.)		(oz.)		(lbs.)
Andacollo		49,000		—		—		35,638		—		—
Canadian Malartic(3)		359,000		—		—		96,111		—		—
Cortez GSR1		125,000		—		—		111,613		—		—
Cortez GSR2		1,000		—		—		825		—		—
Cortez GSR3		126,000		—		—		112,438		—		—
Cortez NVR1		91,000		—		—		85,637		—		—
Dolores(4)		65,000		3.3 million		—		53,708		2.7 million		—
Holt(5)		23,000		—		—		21,211		—		—
Las Cruces
Copper						111 million						64.3 million
Leeville		454,000		—		—		315,725		—		—
Mulatos(6)		145,000		—		—		103,152		—		—
Peñasquito(7)		250,000		—		—		164,948		12.9 million		—
Lead						—						101.8 million
Zinc						—						187.3 million
Robinson(8)		25,000		—		—		27,017		—		—
Copper						95 million						68.4 million
Voisey’s Bay(9)
Copper						N/A						40.4 million
Nickel						N/A						94.6 million
Wolverine(9)		N/A		N/A		—		673		276,267		—

 

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