ROYAL GOLD INC - Quarter Report: 2015 March (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 March 31, 2015

 

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 (§232.405 of this chapter) 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” 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 65,187,520 shares of the Company’s common stock, par value $0.01 per share, outstanding as of April 23, 2015.  In addition, as of such date, there were 4,482 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 voting, 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	18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	32
Item 4.	Controls and Procedures	33
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Mine Safety Disclosure	34
Item 5.	Other Information	34
Item 6.	Exhibits	34
SIGNATURES		34

 

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ITEM 1.  FINANCIAL STATEMENTS

 

ROYAL GOLD, INC.

Consolidated Balance Sheets

(Unaudited, in thousands except share data)

 

		March 31,			June 30,
		2015			2014
ASSETS
Cash and equivalents		$	715,228		$	659,536
Royalty receivables		39,486			46,654
Income tax receivable		—			21,947
Prepaid expenses and other		4,911			7,840
Total current assets		759,625			735,977
Royalty and stream interests, net (Note 3)		2,109,702			2,109,067
Available-for-sale securities (Note 4)		5,619			9,608
Other assets		35,081			36,892
Total assets		$	2,910,027		$	2,891,544
LIABILITIES
Accounts payable		2,205			3,897
Dividends payable		14,342			13,678
Income tax payable		3,170			—
Foreign withholding taxes payable		198			2,199
Other current liabilities		5,791			2,730
Total current liabilities		25,706			22,504
Debt (Note 5)		319,484			311,860
Deferred tax liabilities		135,666			169,865
Uncertain tax positions (Note 9)		15,461			13,725
Other long-term liabilities		694			1,033
Total liabilities		497,011			518,987
Commitments and contingencies (Note 12)
EQUITY
Preferred stock, $.01 par value, authorized 10,000,000 shares authorized; and 0 shares issued		—			—
Common stock, $.01 par value, 100,000,000 shares authorized; and 65,029,065 and 64,578,401 shares outstanding, respectively		650			646
Exchangeable shares, no par value, 1,806,649 shares issued, less 1,802,167 and 1,426,792 redeemed shares, respectively		197			16,718
Additional paid-in capital		2,168,675			2,147,650
Accumulated other comprehensive loss		(4,149		)	(160		)
Accumulated earnings		184,644			189,871
Total Royal Gold stockholders’ equity		2,350,017			2,354,725
Non-controlling interests		62,999			17,832
Total equity		2,413,016			2,372,557
Total liabilities and equity		$	2,910,027		$	2,891,544

 

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						For The Nine Months Ended
		March 31,			March 31,			March 31,			March 31,
		2015			2014			2015			2014
Revenue		$	74,110		$	57,748		$	204,439		$	167,020
Costs and expenses
Cost of sales		10,542			1,940			23,452			2,875
General and administrative		5,545			3,866			21,197			15,093
Production taxes		935			1,723			4,356			5,110
Exploration Costs		155			—			155			—
Depreciation, depletion and amortization		24,783			21,605			67,273			66,676
Impairment of royalty and stream interests		—			—			28,339			—
Total costs and expenses		41,960			29,134			144,772			89,754
Operating income		32,150			28,614			59,667			77,266
Interest and other income		435			1,837			714			1,986
Interest and other expense		(6,433		)	(5,990		)	(19,502		)	(17,580		)
Income before income taxes		26,152			24,461			40,879			61,672
Income tax expense		(1,041		)	(3,980		)	(3,172		)	(15,133		)
Net income		25,111			20,481			37,707			46,539
Net income attributable to non-controlling interests		(97		)	(338		)	(559		)	(535		)
Net income attributable to Royal Gold common stockholders		$	25,014		$	20,143		$	37,148		$	46,004
Net income		$	25,111		$	20,481		$	37,707		$	46,539
Adjustments to comprehensive income, net of tax
Unrealized change in market value of available-for-sale securities		(2,168		)	(127		)	(3,988		)	(2,415		)
Comprehensive income		22,943			20,354			33,719			44,124
Comprehensive income attributable to non-controlling interests		(97		)	(338		)	(559		)	(535		)
Comprehensive income attributable to Royal Gold stockholders		$	22,846		$	20,016		$	33,160		$	43,589
Net income per share available to Royal Gold common stockholders:
Basic earnings per share		$	0.38		$	0.31		$	0.57		$	0.71
Basic weighted average shares outstanding		65,033,547			64,963,605			64,999,331			64,895,464
Diluted earnings per share		$	0.38		$	0.31		$	0.57		$	0.71
Diluted weighted average shares outstanding		65,129,362			65,082,780			65,122,313			65,012,901
Cash dividends declared per common share		$	0.22		$	0.21		$	0.65		$	0.62

 

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 Nine Months Ended
		March 31,			March 31,
		2015			2014
Cash flows from operating activities:
Net income		$	37,707		$	46,539
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization		67,273			66,676
Non-cash employee stock compensation expense		3,660			1,289
Gain on distribution to non-controlling interest		—			(259		)
Amortization of debt discount		7,624			7,138
Impairment of royalty and stream interests		28,339			—
Tax benefit of stock-based compensation exercises		(74		)	(320		)
Deferred tax benefit		(34,199		)	(13,002		)
Changes in assets and liabilities:
Royalty receivables		7,168			8,175
Prepaid expenses and other assets		4,471			12,329
Accounts payable		(1,742		)	194
Foreign withholding taxes payable		(2,001		)	(11,533		)
Income taxes payable (receivable)		25,191			(4,551		)
Other liabilities		4,777			2,411
Net cash provided by operating activities		$	148,194		$	115,086
Cash flows from investing activities:
Acquisition of royalty and stream interests		(60,341		)	(79,692		)
Tulsequah stream termination		10,000			—
Other		(71		)	227
Net cash used in investing activities		$	(50,412	)	$	(79,465	)
Cash flows from financing activities:
Net proceeds from issuance of common stock		775			561
Common stock dividends		(41,712		)	(39,706		)
Purchase of additional royalty interest from non-controlling interest		—			(11,522		)
Debt issuance costs		—			(1,284		)
Distribution to non-controlling interests		(1,227		)	(1,913		)
Tax expense of stock-based compensation exercises		74			320
Net cash used in financing activities		$	(42,090	)	$	(53,544	)
Net increase (decrease) in cash and equivalents		55,692			(17,923		)
Cash and equivalents at beginning of period		659,536			664,035
Cash and equivalents at end of period		$	715,228		$	646,112

 

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

 

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, metal streams, and similar interests.  Royalties are non-operating interests in mining projects that provide the right to revenue or metals produced from the project after deducting specified costs, if any.  A metal stream is a purchase agreement that provides, in exchange for an upfront deposit payment, the right to purchase all or a portion of one or more metals produced from a mine, at a price determined for the life of the transaction by the purchase agreement.

 

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 and nine months ended March 31, 2015, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2015.  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, 2014 filed with the Securities and Exchange Commission on August 7, 2014 (“Fiscal 2014 10-K”).

 

Asset Impairment

 

We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts of an asset or group of assets may not be recoverable.  The recoverability of the carrying value of royalty and stream interests in production and development stage mineral properties is evaluated based upon estimated future undiscounted net cash flows from each royalty and stream interest property using estimates of proven and probable reserves and other relevant information received from the operators.  We evaluate the recoverability of the carrying value of royalty interests in exploration stage mineral properties in the event of significant decreases in the price of gold, silver, copper, nickel and other metals, and whenever new information regarding the mineral properties is obtained from the operator indicating that production will not likely occur or may be reduced in the future, thus affecting the future recoverability of our royalty interests.  Impairments in the carrying value of each property are measured and recorded to the extent that the carrying value in each property exceeds its estimated fair value, which is generally calculated using estimated future discounted cash flows.

 

Our estimates of gold, silver, copper, nickel and other metal prices, operators’ estimates of proven and probable reserves related to our royalty or streaming properties, and operators’ estimates of operating, capital and reclamation costs are subject to certain risks and uncertainties which may affect the recoverability of our investment in these royalty and stream interests in mineral properties.  Although we have made our best assessment of these factors based on current market conditions, it is possible that changes could occur, which could adversely affect the net cash flows expected to be generated from these royalty and stream interests.  Refer to Note 3 for discussion and the results of our quarterly impairment assessments for the three and nine months ended March 31, 2015.

 

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

Recently Issued Accounting Pronouncements

 

In February 2015, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2015-02, Amendments to the Consolidation Analysis.  This ASU affects reporting entities that are required to evaluate whether they should consolidate certain legal entities.  This update makes some targeted changes to current consolidation guidance and impacts both the voting and the variable interest consolidation models.  In particular, the update will change how companies determine whether limited partnerships or similar entities are variable interest entities (“VIEs”).  The update is effective for us in the first quarter of our fiscal year 2016.  We are currently evaluating the impact of this new standard on our consolidated financial statements.

 

2.             ACQUISITIONS

 

Acquisition of Gold Stream on Euromax’s Ilovitza Project

 

On October 20, 2014, RGLD Gold AG (“RGLD Gold”), a wholly owned subsidiary of the Company, entered into a $175.0 million gold stream transaction with Euromax Resources Ltd (“Euromax”) that will finance a definitive feasibility study, permitting work, early stage engineering and a significant portion of the construction at Euromax’s Ilovitza gold-copper project located in southeast Macedonia.  RGLD Gold will make two advance deposit payments to Euromax totaling $15.0 million, which will be used for completion of the definitive feasibility study and permitting of the project, followed by payments aggregating $160 million towards project construction, in each case subject to certain conditions.  Payment of the first $7.5 million deposit was completed in March 2015.  Royal Gold’s decision to proceed with the second $7.5 million deposit and the construction payments is conditioned upon, among other things, its satisfaction with the progress of definitive feasibility study and environmental evaluations, demonstrated project viability, and, in the case of the construction payments, sufficient project financing and permits to construct and operate the mine. The construction payments would be paid pro-rata with the balance of the project funding.  In exchange, Euromax will deliver physical gold equal to 25% of gold produced from the Ilovitza project until 525,000 ounces have been delivered, and 12.5% thereafter (in each case subject to adjustment).  RGLD Gold’s purchase price per ounce will be 25% of the spot price at the time of delivery.

 

The Ilovitza gold stream acquisition has been accounted for as an asset acquisition.  The $7.5 million paid as part of the aggregate pre-production commitment of $175 million, plus direct transaction costs, have been recorded as a development stage stream interest within Royalty and stream interests, net on our consolidated balance sheets.

 

Tetlin Royalty Acquisitions and Peak Gold Joint Venture

 

On September 30, 2014, Royal Gold acquired a 2.0% net smelter return (“NSR”) royalty and a 3.0% NSR royalty held by private parties over areas comprising the Tetlin gold project located near Tok, Alaska, for total consideration of $6.0 million.  As discussed below, the Tetlin gold project is now held by Peak Gold LLC (“Peak Gold”), a joint venture between subsidiaries of Royal Gold and Contango ORE Inc.

 

The acquisition of the Tetlin royalties has been accounted for as an asset acquisition.  The total purchase price of $6.0 million, plus direct transaction costs, has been recorded as an exploration stage royalty interest within Royalty and stream interests, net on our consolidated balance sheets.

 

On January 8, 2015, Royal Gold, through its wholly-owned subsidiary, Royal Alaska, LLC (“Royal Alaska”), and Contango ORE, Inc., through its wholly-owned subsidiary CORE Alaska, LLC (together,

 

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

“Contango”),  entered into a limited liability company agreement for Peak Gold, a joint venture for exploration and advancement of the Tetlin gold project located near Tok, Alaska (the “Project”).  Contango contributed all of its assets relating to the Project to Peak Gold, including a mining lease and certain state of Alaska mining claims.  Royal Alaska contributed $5.0 million in cash to Peak Gold.  Contango will initially hold a 100% membership interest in Peak Gold. Royal Alaska has the right to obtain up to 40% of the membership interest in Peak Gold by making contributions of up to $30.0 million (including Royal Alaska’s initial $5.0 million contribution) in cash to Peak Gold by October 31, 2018.

 

Royal Alaska will act as the manager of Peak Gold.  As manager of Peak Gold, Royal Alaska is responsible for managing, directing and controlling the overall operations during the earn-in period, and thereafter, provided Royal Alaska holds at least a 40% interest.   Royal Alaska will act as manager unless and until it is unanimously removed or resigns that position in the manner provided in Peak Gold’s limited liability company agreement.

 

The Company follows the Accounting Standards Codification guidance for identification and reporting of entities for which control is achieved through means other than voting rights.  The guidance defines such entities as VIEs.  The Company has identified Peak Gold as a VIE, with Royal Alaska as the primary beneficiary, due to the legal structure and certain related factors of the limited liability company agreement for Peak Gold.  The Company determined that Peak Gold should be fully consolidated at fair value initially.  As of March 31, 2015, the preliminary fair value of the Company’s non-controlling interest is $45.7 million and is based on the underlying value of the mineral property assigned to Peak Gold, which is recorded as an exploration stage property within Royalty and stream interests, net on our consolidated balance sheets.  The fair value of the non-controlling interest and corresponding mineral property may change upon the Company’s completion of its fair value analysis.

 

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

3.             ROYALTY AND STREAM INTERESTS

 

The following tables summarize the Company’s royalty and stream interests as of March 31, 2015 and June 30, 2014.

 

As of March 31, 2015 (Amounts in thousands):		Cost			Accumulated Depletion			Impairments			Net
Production stage royalty interests:
Andacollo		$	272,998		$	(62,990	)	$	—		$	210,008
Voisey’s Bay		150,138			(74,506		)	—			75,632
Peñasquito		99,172			(22,266		)	—			76,906
Mulatos		48,092			(31,362		)	—			16,730
Holt		34,612			(13,092		)	—			21,520
Robinson		17,825			(12,565		)	—			5,260
Cortez		10,630			(9,883		)	—			747
Other		495,763			(255,997		)	(27,586		)	212,180
Total production stage royalty interests		1,129,230			(482,661		)	(27,586		)	618,983
Production stage stream interests:
Mount Milligan		783,046			(27,185		)	—			755,861
Total production stage royalty and stream interests		1,912,276			(509,846		)	(27,586		)	1,374,844
Development stage royalty interests:
Pascua-Lama		372,105			—			—			372,105
Other		67,017			—			—			67,017
Total development stage royalty interests		439,122			—			—			439,122
Total development stage stream interests		83,937			—			(603		)	83,334
Total development stage royalty and stream interests		523,059			—			(603		)	522,456
Exploration stage royalty interests		212,552			—			(150		)	212,402
Total royalty and stream interests		$	2,647,887		$	(509,846	)	$	(28,339	)	$	2,109,702

 

As of June 30, 2014 (Amounts in thousands):		Cost			Accumulated Depletion			Impairments			Net
Production stage royalty interests:
Andacollo		$	272,998		$	(56,147	)	$	—		$	216,851
Voisey’s Bay		150,138			(67,377		)	—			82,761
Peñasquito		99,172			(17,801		)	—			81,371
Mulatos		48,092			(28,548		)				19,544
Holt		34,612			(10,474		)	—			24,138
Robinson		17,825			(11,887		)				5,938
Cortez		10,630			(9,772		)	—			858
Other		488,309			(232,913		)	—			255,396
Total production stage royalty interests		1,121,776			(434,919		)	—			686,857
Production stage stream interests:
Mount Milligan		783,046			(7,741		)	—			775,305
Total production stage royalty and stream interests		1,904,822			(442,660		)	—			1,462,162
Development stage royalty interests:
Pascua-Lama		372,105			—			—			372,105
Other		69,488			—			—			69,488
Total development stage royalty interests		441,593			—			—			441,593
Total development stage stream interests		41,103			—			—			41,103
Total development stage royalty and stream interests		482,696			—			—			482,696
Exploration stage royalty interests		164,209			—			—			164,209
Total royalty and stream interests		$	2,551,727		$	(442,660	)	$	—		$	2,109,067

 

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

Impairment of royalty and stream interests

 

In accordance with our impairment accounting policy discussed in Note 1, impairments in the carrying value of each royalty or stream interest are measured and recorded to the extent that the carrying value in each royalty or stream interest exceeds its estimated fair value, which is generally calculated using estimated future discounted cash-flows. As part of the Company’s regular asset impairment analysis, which included the presence of impairment indicators, the Company recorded impairment charges for the nine months ended March 31, 2015 and 2014, as summarized in the following table:

 

		For The Nine Months Ended
		March 31,			March 31,
		2015			2014
		(Amounts in thousands)
Wolverine(1)		$	25,967		$	—
Other		2,372			—
Total impairment of royalty and stream interests		$	28,339		$	—

 

(1)  Included in Other production stage royalty interests in the above royalty and stream interests table.

 

The Company did not record any impairment charges during the three months ended March 31, 2015 and 2014.

 

Wolverine

 

The Company owns a 0.00% to 9.445% sliding-scale NSR royalty on all gold and silver produced from the Wolverine underground mine and milling operation located in Yukon Territory, Canada, and operated by Yukon Zinc Corporation (“Yukon Zinc”).  As part of the Company’s impairment assessment for the three months ended December 31, 2014, the Company was notified of an updated mine plan at Wolverine, which included a significant reduction in reserves and resources when compared to the previous mine plan.  A significant reduction in reserves and resources, along with decreases in the long-term metal price assumptions used by the industry, are indicators of impairment.

 

As part of the impairment determination, the fair value for Wolverine was estimated by calculating the net present value of the estimated future cash-flows expected to be generated by the mining of the Wolverine deposits subject to our royalty interest.  The estimates of future cash-flows were derived from a life-of-mine model developed by the Company using Yukon Zinc’s updated mine plan information.  The metal price assumptions used in the Company’s model were supported by consensus price estimates obtained from a number of industry analysts.  The future cash-flows were discounted using a discount rate which reflects specific market risk factors the Company associates with the Wolverine royalty interest.  Following the impairment charge during the three months ended December 31, 2014, the Wolverine royalty interest has a carrying value of $5.3 million as of March 31, 2015.

 

The Company had a royalty receivable of approximately $3.0 million associated with past due royalty payments on the Wolverine interest.  As a result of recent financial and operational results experienced by Yukon Zinc and their decision to put the mine on care and maintenance, the Company believes payment of the receivable is uncertain and provided for an allowance against the entire receivable as of December 31, 2014.  The expense associated with the allowance is recorded within General and administrative expense on the Company’s consolidated statements of operations and comprehensive income for the nine months ended March 31, 2015.

 

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

In March 2015, Yukon Zinc filed for, and was granted, creditor protection by the Supreme Court of British Columbia, Canada in a court monitored debtor-in-possession process.  Yukon Zinc has received court approval to initiate a sale process.  The Company will continue to pursue collection of all past due payments and protection of our royalty interest.  The Company did not recognize revenue associated with the Wolverine royalty interest during the three months ended March 31, 2015 and December 31, 2014.

 

Other

 

As part of the Company’s regular asset impairment analysis during the three months ended September 30, 2014, the Company determined that one production stage royalty interest and one exploration stage royalty interest should be written down to zero for a total impairment of $1.8 million.  As part of the termination of the Tulsequah Chief gold and silver stream, as discussed below, the Company wrote-off approximately $0.6 million of direct acquisition costs during the three months ended December 31, 2014.

 

Termination of the Tulsequah Chief Gold and Silver Stream

 

On December 22, 2014, RGLD Gold terminated the Amended and Restated Gold and Silver Purchase and Sale Agreement (the “Agreement”), between RGLD Gold, the Company, Chieftain Metals Inc. and Chieftain Metals Corp. (together, “Chieftain”), relating to Chieftain’s Tulsequah Chief polymetallic mining project located in British Columbia, Canada.  Pursuant to the terms of the Agreement, Chieftain repaid RGLD Gold’s original $10.0 million advance payment.  As a result of the termination of the Agreement, the carrying value ($10.6 million) of the Tulsequah Chief gold and silver stream was reduced to zero during the three months ended December 31, 2014.

 

4.             AVAILABLE-FOR-SALE SECURITIES

 

The Company’s available-for-sale securities as of March 31, 2015 and June 30, 2014 consist of the following:

 

		As of March 31, 2015
		(Amounts in thousands)
					Unrealized
		Cost Basis			Gain			Loss			Fair Value
Non-current:
Seabridge		$	9,565		—			(3,982		)	$	5,583
Other		203			—			(167		)	36
		$	9,768		$	—		$	(4,149	)	$	5,619

 

		As of June 30, 2014
		(Amounts in thousands)
					Unrealized
		Cost Basis			Gain			Loss			Fair Value
Non-current:
Seabridge		$	9,565		—			—			$	9,565
Other		203			—			(160		)	43
		$	9,768		$	—		$	(160	)	$	9,608

 

The most significant available-for-sale security is the investment in Seabridge Gold, Inc. (“Seabridge”) common stock, acquired in June 2011 and discussed in greater detail in our Fiscal 2014 10-K.  The

 

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

Company’s policy for determining whether declines in fair value of available-for-sale securities are other than temporary includes a quarterly analysis of the investments and a review by management of all investments for which the cost exceeds the fair value.  Any temporary declines in fair value are recorded as a charge to other comprehensive income.  If such impairment is determined by the Company to be other than temporary, the investment’s cost basis is written down to fair value and recorded in net income during the period the Company determines such impairment to be other than temporary.  Based on the Company’s quarterly analysis of its investments and our ability and intent to hold these investments for a reasonable period of time, there were no write downs on our available-for-sale securities during the three and nine months ended March 31, 2015.  The Company recognized a loss on available-for-sale securities of $4.5 million during the fourth quarter of our fiscal year ended June 30, 2014.  The Company will continue to evaluate its investment in Seabridge common stock considering additional facts and circumstances as they arise, including, but not limited to, the progress of development of Seabridge’s KSM project.

 

5.                                      DEBT

 

The Company’s non-current debt as of March 31, 2015 and June 30, 2014 consists of the following:

 

		As of			As of
		March 31, 2015			June 30, 2014
		Non-current			Non-current
		(Amounts in thousands)
Convertible notes due 2019, net		$	319,484		$	311,860
Total debt		$	319,484		$	311,860

 

Convertible Senior Notes Due 2019

 

In June 2012, the Company completed an offering of $370 million aggregate principal amount of 2.875% convertible senior notes due 2019 (“2019 Notes”).  The 2019 Notes bear interest at the rate of 2.875% per annum, and the Company is required to make semi-annual interest payments on the outstanding principal balance of the 2019 Notes on June 15 and December 15 of each year, beginning December 15, 2012. The 2019 Notes mature on June 15, 2019.  Interest expense recognized on the 2019 Notes for the three and nine months ended March 31, 2015, was $5.6 million and $16.5 million, respectively, compared to $5.4 million and $16.0 million for the three and nine months ended March 31, 2014, and included the contractual coupon interest, the accretion of the debt discount and amortization of the debt issuance costs.

 

Revolving credit facility

 

The Company maintains a $450 million revolving credit facility.  As of March 31, 2015, the Company had no amounts outstanding under the revolving credit facility.  As discussed in Note 6 to the notes to consolidated financial statements in the Company’s Fiscal 2014 10-K, the Company has financial covenants associated with its revolving credit facility.  At March 31, 2015, the Company was in compliance with each financial covenant.  Refer to Note 13 for an update to our revolving credit facility.

 

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

6.                                      REVENUE

 

Revenue is comprised of the following:

 

		For The Three Months Ended						For The Nine Months Ended
		March 31,			March 31,			March 31,			March 31,
		2015			2014			2015			2014
		(Amounts in thousands)						(Amounts in thousands)
Royalty interests		$	44,392		$	51,795		$	137,746		$	158,429
Stream interests		29,718			5,953			66,693			8,591
Total revenue		$	74,110		$	57,748		$	204,439		$	167,020

 

7.                                      STOCK-BASED COMPENSATION

 

The Company recognized stock-based compensation expense as follows:

 

		For The Three Months Ended						For The Nine Months Ended
		March 31,			March 31,			March 31,			March 31,
		2015			2014			2015			2014
		(Amounts in thousands)						(Amounts in thousands)
Stock options		$	112		$	88		$	331		$	356
Stock appreciation rights		361			316			1,054			980
Restricted stock		637			389			1,964			2,437
Performance stock		(274		)	(1,263		)	311			(2,484		)
Total stock-based compensation expense		$	836		$	(470	)	$	3,660		$	1,289

 

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

 

As of March 31, 2015, unrecognized compensation expense (expressed in thousands below) and weighted-average vesting period for each of our stock-based compensation awards was as follows:

 

		Unrecognized compensation expense			Weighted- average vesting period (years)
Stock options		$	652		1.9
Stock appreciation rights		2,206			2.0
Restricted stock		5,936			3.3
Performance stock		1,001			1.6

 

8.                                      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.

 

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

The Company’s unexercised stock options, unexercised SSARs 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						For The Nine Months Ended
		March 31,			March 31,			March 31,			March 31,
		2015			2014			2015			2014
		(in thousands, except per share data)						(in thousands, except per share data)
Net income available to Royal Gold common stockholders		$	25,014		$	20,143		$	37,148		$	46,004
Weighted-average shares for basic EPS		65,033,547			64,963,605			64,999,331			64,895,464
Effect of other dilutive securities		95,815			119,175			122,982			117,437
Weighted-average shares for diluted EPS		65,129,362			65,082,780			65,122,313			65,012,901
Basic earnings per share		$	0.38		$	0.31		$	0.57		$	0.71
Diluted earnings per share		$	0.38		$	0.31		$	0.57		$	0.71

 

The 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.  The Company intends to settle the principal amount of the 2019 Notes in cash.  As a result, there will be no impact to diluted earnings per share unless the share price of the Company’s common stock exceeds the conversion price of $105.31.

 

9.                                      INCOME TAXES

 

		For The Three Months Ended						For The Nine Months Ended
		March 31,			March 31,			March 31,			March 31,
		2015			2014			2015			2014
		(Amounts in thousands, except rate)						(Amounts in thousands, except rate)
Income tax expense		$	1,041		$	3,980		$	3,172		$	15,133
Effective tax rate		4.0		%	16.3		%	7.8		%	24.5		%

 

The decrease in the effective tax rate for the three and nine months ended March 31, 2015, is primarily related to a decrease in unrealized taxable foreign currency exchange gains and a favorable tax rate associated with certain operations in lower-tax jurisdictions. The decrease in the effective tax rate for the nine months ended March 31, 2015, is also attributable to (i) a valuation allowance release as a result of the strengthening U.S. dollar, (ii) a decrease in tax expense due to the Chilean tax legislation enacted in the quarter ended September 30, 2014 and the corresponding re-measurement of the Chilean long term deferred tax asset to the higher corporate income tax rate and (iii) the impairment charge on the Wolverine royalty interest and the corresponding tax benefit recorded in the quarter ended December 31, 2014. The decrease in tax expense was partially offset by an increase in current year tax expense due to the accrual for uncertain tax positions.

 

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 2010.  As a result of (i) statutes of limitation that will begin to expire within the next 12 months in various

 

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ROYAL GOLD, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

jurisdictions, (ii) possible settlements of audit-related issues with taxing authorities in various jurisdictions with respect to which none of the issues are individually significant, and (iii) additional accrual of exposure and interest on existing items, the Company believes that it is reasonably possible that the total amount of its net unrecognized income tax benefits will not decrease in the next 12 months.

 

As of March 31, 2015 and June 30, 2014, the Company had $15.5 million and $13.7 million of total gross unrecognized tax benefits, respectively.  If recognized, these unrecognized tax benefits would positively 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 March 31, 2015 and June 30, 2014, the amount of accrued income-tax-related interest and penalties was $6.9 million and $5.4 million, respectively.

 

10.                               SEGMENT INFORMATION

 

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

 

		Revenue								Royalty and Stream Interests, net
		Three Months Ended				Nine Months Ended
		March 31,				March 31,				As of		As of
		2015		2014		2015		2014		March 31, 2015		June 30, 2014
Canada		50	%	35	%	47	%	30	%	51	%	53	%
United States		15	%	16	%	16	%	15	%	5	%	3	%
Mexico		15	%	18	%	14	%	19	%	6	%	7	%
Chile		12	%	19	%	15	%	24	%	31	%	31	%
Australia		3	%	3	%	3	%	4	%	2	%	3	%
Africa		1	%	5	%	1	%	4	%	1	%	1	%
Other		4	%	4	%	4	%	4	%	4	%	2	%

 

11.                               FAIR VALUE MEASUREMENTS

 

FASB Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures (“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 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

 

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.

 

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