2023-05-06 02:39:25 ET
Summary
- Royal Gold released its Q1 results this week, reporting quarterly volume of ~90,200 GEOs and revenue of $170.4 million.
- This was helped by the start of contributions from Khoemacau, King of the Hills & increased Cortez royalties, but partially offset by lower attributable production from Pueblo Viejo & Andacollo.
- The good news is that the company continues to see meaningful resource/reserve growth in regard to attributable ounces held by partners, and the PV Expansion is near completion.
- So, with significant growth on deck and over $630 million in liquidity to deploy if opportunities arise, I continue to see RGLD as a top way to get precious metals exposure, and I would be interested in adding a new position if we see a sharp pullback.
We're nearly halfway through the Q1 Earnings Season for the Gold Miners Index ( GDX ) and one of the most recent companies to report its results is Royal Gold ( RGLD ). While the company's guidance provided last month disappointed the market a little, the positives across the portfolio far outweigh the negatives, the company has continued to improve its diversification from a NAV standpoint with multiple royalties added in North America (Cortez additions, Great Bear, Cote, Red Chris), and while 2023 may be another flat year for attributable gold-equivalent ounce [GEO] production, we should see a significant step up in GEO production by 2025. Let's take a closer look at the recent quarter below:
Q1 Results
Royal Gold released its Q1 results this week, reporting quarterly attributable production of ~90,200 gold-equivalent ounces. This translated to quarterly revenue of $170.4 million, a 6% increase from the year-ago period. The increase in revenue was driven by slightly higher attributable production and higher gold prices ($1,890/oz vs. $1,877/oz), partially offset by lower average realized prices for silver and copper. If we assume the company is able to deliver at the midpoint of its guidance (325,000 to 345,000 GEOs), this would represent flat GEOs volumes year-over-year, which is a little lighter than the market might have been hoping for given the sharp sell-off following the guidance announcement in late April.
Royal Gold - Quarterly Gold-Equivalent Ounce Production (Company Filings, Author's Chart)
Digging into the quarter a little closer, Royal Gold saw increased revenue from its Cortez royalties (including a ~$3.0 million contribution from the Cortez CC Zone), plus higher revenue from Mount Milligan and Khoemacau, which has finally ramped up to nameplate capacity. In addition, the company saw a minor contribution from King of The Hills in Australia. However, this was partially offset by lower contributions from other assets such as Penasquito (lower gold/silver grades), Andacollo, Pueblo Viejo, Voisey's Bay, Canadian Malartic, Goldstrike, Dolores, and Gwalia Deeps. The good news is that Pueblo Viejo is expected to contribute more in the second half with the throughput expansion nearing completion and multiple smaller assets are getting closer to contributing, including Granite Creek (Nevada), Bellevue Gold (Australia), and Mara Rosa (Brazil).
Royal Gold - Quarterly Revenue, Operating Cash Flow & Free Cash Flow (Company Filings, Author's Chart)
As for the company's performance from a cash flow standpoint, Royal Gold reported operating cash flow of $108.7 million, an 8% increase from Q1 2022 levels. This helped the company to pay down $75 million in debt and finish the quarter with over $200 million in cash and over $630 million in available liquidity. Royal Gold noted in its most recent Investor Day Presentation that this is sufficient for remaining active on new potential deals, that it continues to hunt for opportunities in the $100-$300 million range, but that it will remain focused on precious metals, with little interest in venturing into lithium or rare earths, which is encouraging for investors that want pure-play exposure to precious metals with a side of copper.
Finally, it's worth noting that while FY2023 guidance was slightly below market expectations due to significant concentrate sales expected in Q4 from Mount Milligan and the delay in deliveries, the big picture continues to remain solid, with reserve increases across the portfolio. Three notable increases were the extension of the mine life at Pueblo Viejo to 2044 with Barrick's completed PFS for the Naranjo TSF that added ~6.5 million attributable ounces of gold reserves to the asset and helped Barrick ( GOLD ) report successful reserve replacement. And while this is great news for Barrick and Newmont ( NEM ) given that this is a massive low-cost mine capable of producing 800,000+ ounces per annum post-expansion, it's also great news for Royal Gold which holds a 7.5% gold stream and 75% silver stream on the asset.
Elsewhere in the portfolio, Ero Copper ( ERO ) reported ounce growth at its Xavantina Mine in Brazil and Nevada Gold Mines LLC reported meaningful growth in resources at its Cortez Complex which is Royal Gold's #2 contributor. This included a maiden gold reserve declared at the Robertson Project where Royal Gold holds a 0.45% GRR, which is expected to be a future source of oxide feed post-2026 for the Cortez Complex. And before moving on, it's worth noting that Royal Gold has already recovered ~80% of its investment in Pueblo Viejo, so the majority of the significant mine life extension with higher throughput that will benefit future attributable production is all gravy.
Recent Developments
As for recent developments, Barrick provided additional detail in regards to its shared Nevada operating portfolio in its 2022 Annual Report and there was lots to be excited about at Cortez. For those unfamiliar with this asset, the larger update I published provides more detail, but this is the second largest mining complex within Nevada Gold Mines LLC, and on a 100% basis, the asset is expected to produce ~1.0 million ounces this year even without significant contribution from Goldrush (awaiting Record of Decision expected in H2 2023), with production stepping up to ~1.3 million ounces in 2027. Royal Gold now has full coverage of this asset following recent transactions and to put this asset in perspective, it's nearly the same size of Agnico Eagle's ( AEM ) Detour Lake and Canadian Malartic mines combined at the expected 2027 run rate, which are Canada's two largest gold mines.
Royal Gold - Cortez Complex Royalties (Company Presentation)
Digging into Cortez closer, Barrick appears confident in future resource growth at extensions to Robertson (low-grade heap leach project) with additional targets including Distal, the gap between Gold Pan and Porphyry, and Altenburg Hill). Plus, the company is also generating promising results from the Cortez Hills Underground Extension (Hanson Feeder). Highlight intercepts at Hanson include 24.7 meters at 6.67 grams per tonne of gold, 12.2 meters at 7.60 grams per tonne of gold, and 20.1 meters at 9.64 grams per tonne of gold, which are all mostly in line with or above the average reserve grade at Cortez Underground. However, the most exciting opportunity here continues to be Fourmile which boasts world-class grades, with the potential for a reserve grade of 10.0+ grams per tonne of gold even after factoring in mining dilution.
As shown in the earlier chart, a key contributor to the post-2018 resource growth is the company's Fourmile discovery made last decade which may have been missed if not for persistence testing the ground north of Goldrush given that the first 10 holes disappointed on a relative basis given their proximity to a massive high-grade ore body (Goldrush). However, this changed with drill-hole 427, which hit 5.8 meters of 49.7 grams per tonne of gold, instilling hope that the company might uncover another high-grade deposit at the Cortez Complex. This has certainly been the case with Goldrush and Fourmile being two high-grade future refractory ore sources for Carlin's processing facilities, and the current resource base at Fourmile sits at 0.50 million ounces in the indicated category at 10.01 grams per tonne of gold and an additional 2.7 million ounces in the inferred category at 10.5 grams per tonne of gold.
Goldrush/Fourmile (Barrick Presentation)
In Barrick's 2022 Annual Report, the company noted that mineralization continues to extend to the north at the Dorothy target (800 meters north of the Fourmile resource), with the best intercept at Dorothy intersecting 31.7 meters at 33.69 grams per tonne of gold. This was one of the best intercepts drilled sector-wide in 2022 among all gold companies (gram-meter basis) and especially when adjusting for only holes above 10 meter widths. Another highlight intercept was 39.6 meters at 12.71 grams per tonne of gold. Barrick noted that this represented the most continuous zones of mineralization in this target area and that they "increase the potential at Dorothy as " the mineralization is observed at a lower horizon than previously tested in the target area and remains open in all directions. "
Notably, both holes (FM22-180D and FM22-179D) also hit shallower mineralization along the Sadler Fault in what is a key structural control for the Fourmile resource to the south. Shallower intercepts included 18.0 meters at 29.67 grams per tonne of gold and 4.0 meters at 13.62 grams per tonne of gold, with both intercepts being well above the average grade of Fourmile and Goldrush. Regarding these holes, Barrick noted:
"these intercepts are beginning to establish a thicker and more continuous zone of mineralization along this key structure in the Dorothy area as well"
- Barrick Gold, 2022 Annual Report
It's critical to point out that it's still very early days for exploration at Dorothy, and there's no guarantee that this is a 2.0+ million-ounce extension north of Fourmile. However, it would be quite rare to see intercepts of this calibre this close to two major deposits that aren't continuous and this certainly points to the potential for Fourmile (with Dorothy) growing into a 5.0+ million ounce resource. To summarize, this is a very positive development for Barrick which owns 100% of Fourmile and Royal Gold which now has a ~1.6% royalty rate with its Rio Tinto ( RIO ) and Idaho royalties added in the past year.
Finally, in addition to resource growth at key assets and continued blockbuster results out of East Ridge at Red Chris, Royal Gold got a second upgrade from an operator standpoint within its portfolio. The first came in 2021 when the much larger and better capitalized Chifeng Gold ($3.0+ billion market cap and six mines) acquired the much smaller Golden Star and its Wassa Mine in Ghana, a key asset for Royal Gold. The second occurred with B2Gold's ( BTG ) takeover of Sabina Gold and its Back River Project in Nunavut. Not only does this acquisition suggest a higher probability of a possible throughput increase and mine life extensions, but also the possibility of incorporating George down the road, an even larger iron formation to the north where Royal Gold holds a higher GSR royalty than Goose (under construction), with royalty rates on Goose and George of 1.95% and 2.35%, respectively.
George Property - Targets (Sabina Gold Presentation)
Given the 800,000 ounce hurdle before George begins contributing, I certainly wouldn't model this asset contributing before 2031 to be conservative. Still, this could be a cash cow next decade with the potential for this to be a high-grade spike feeding the Goose Plant, which has an additional 2,000 tonnes per day of design capacity above the planned throughput rate. This isn't to suggest that this wouldn't have been a great contributor under Sabina's current management, but when your operating partner goes from a gold developer with a ~$600 million market cap to a gold producer with a ~$4.0+ billion market cap with three mines and significant operating experience in frigid climates (Kupol/Dvoinoye in Russia with Bema), this is certainly a development to celebrate.
Valuation & Technical Picture
As shown in the chart below, Royal Gold has historically traded at ~25.8x cash flow, a premium multiple to most junior royalty/streaming companies and producers given its superior business model with significant diversification across assets/countries, insulation from inflationary pressures, lower cost of capital vs. smaller peers and industry-leading margins. Based on a current share price of $142.00 and FY2023 cash flow per share estimates of $6.80, it trades at ~20.9x cash flow, a discount to this historical multiple. And while I believe that a premium multiple is justified given that Royal Gold is more diversified with just ~35% of NAV in its top two assets (Cortez/Mount Milligan) which actually beats out Wheaton PM ( WPM ) with nearly 40% tied to Salobo, I think a more conservative multiple for the stock is 24.0x cash flow.
After multiplying this figure by FY2023 cash flow per share estimates, I see a fair value for RGLD of $163.20.
RGLD Historical Cash Flow Multiple (FASTGraphs.com)
Although this points to a 13% upside from current levels, I am looking for a minimum 30% discount to fair value when it comes to mid-size royalty/streaming companies. Once we apply this discount to bake in a margin of safety, the ideal buy zone comes in below $114.30. Obviously, there's no guarantee that the stock gets back to this level, and it's certainly not likely if gold remains above $1,900/oz. However, I prefer to buy at the right price or pass entirely when it comes to cyclical stocks, and while Royal Gold is undoubtedly a top-10 way to gain exposure to precious metals and a staple for any precious metals portfolio, I remain on the sidelines for now waiting for a more attractive entry point and focused on other names where I see a more meaningful margin of safety. One name that stands out is Capri Holdings ( CPRI ) below $38.00, trading at just over 6c FY2024 earnings estimates.
Summary
Royal Gold had a solid start to the year and while it may be lagging behind some of its smaller peers from a growth standpoint, the company has set itself up for meaningful organic growth and its actions the past two years are not reflected in its most recent results. These actions include locking up royalties on some of the best assets in the safest jurisdictions that are importantly core assets to their well-capitalized operators, and with nearly $900 million in liquidity by year-end, the company has a war chest to deploy in mid-sized or mega deals if an attractive opportunity comes across the plate.
This combination of strong organic growth, the ability to out-muscle some of its smaller peers due to superior liquidity and lower cost of capital and significant free cash flow generation makes RGLD one of the sector's best buy-the-dip candidates. That said, I prefer to wait for a significant margin of safety to justify starting new positions and given the stock's rally, this isn't the case at current levels. So, while I think the stock belongs at the top of any investors' watchlist if we do see a meaningful correction, I'm focused elsewhere currently.
For further details see:
Royal Gold: A Solid Start To 2023