2023-12-07 14:39:22 ET
Summary
- Royal Gold had a weaker Q3 with lower attributable production from several assets, albeit this was out of its control given that it's not the operator.
- Fortunately, we saw multiple positive developments across the portfolio at non-producing assets, and several smaller assets are getting closer to first production/ramping up next year.
- In this update we'll dig into the Q3 results, recent developments and how 2024 is shaping up:
The Q3 Earnings Season was a mixed one for the Gold Miners Index ( GDX ) and unlike the past two years when the royalty/streaming companies were riding high while the producers dealt with margin compression, Q3 wasn't as positive for the royalty/streaming companies even with their inflation protection. This is because the Penasquito strike put a dent in royalty/stream sales for Royal Gold ( RGLD ) and Wheaton Precious Metals ( WPM ), and Royal Gold saw a further impact from a slower ramp-up at Pueblo Viejo and softer production from Mount Milligan. And while these were partially offset by higher output from other assets, new and or newly producing assets weren't able to fill the full gap. The result? Royal Gold is now set to deliver below the bottom end of guidance, setting up a weaker 2023 than I previously envisioned. In this update we'll dig into the Q3 results, recent developments and how 2024 is shaping up:
All figures are in United States Dollars and all production figures are in tonnes unless otherwise noted by tons .
Q3 Results
Royal Gold released its Q3 results last month, reporting quarterly volume of ~71,900 gold-equivalent ounces [GEOs], a ~5% decline from the year-ago period, but with the company lapping very easy comps evidenced by 2-year GEO volume down over 20%. This sharp decline was attributed to no contribution from the massive Penasquito Mine (the strike has since been resolved), significantly lower production from Royal Gold's key Mount Milligan stream, in addition to lower silver deliveries from Pueblo Viejo (delayed ramp up and continued deferrals) where a total of ~688,000 ounces have been deferred, and lower output from Canadian Malartic, LZ5, Voisey's Bay, Robinson, Marigold, and Goldstrike. Unfortunately, this has left Royal Gold sitting at just ~73% of the low end of FY2023 guidance, suggesting output is likely to come in below the low end with limited contribution from Penasquito until it gets back to its normal pace of operations closer to year-end.
Royal Gold - Quarerly GEO Volume - Company Filings, Author's Chart
Digging into the headwinds a little closer at key assets, Centerra Gold ( CGAU ) noted that production was impacted by mining the rest of the ore-waste transition zone in Phase 9 of the mine plan and lower recoveries from blending Phase 7 (high-grade gold/low grade copper) and Phase 9 material (low grade gold/high grade copper). This resulted in an elevated ratio of pyrite to chalcopyrite that hurt recovery rates and medium-term recoveries could remain softer for this key asset in the near-term. That said, the company is conducting reviews to improve recoveries and a full asset optimization is underway, which should hopefully lead to better H2-2024 performance from this asset which is one of Royal Gold's largest contributors (~$180 million in revenue in FY2022).
As for Pueblo Viejo, the ramp-up to 14 million tonnes per annum (PV Expansion) was affected by the failure of the gearboxes for the floatation cells and the partial failure of the end of the new conveyor belt to the single-stage SAG mill. The company noted that the float cells supplied by the OEM unfortunately had gear boxes that were under-designed, and while a temporary solution is in place, Barrick ( GOLD ) is waiting to receive new equipment by year-end. Finally, investors will be pleased to know that the strike is finally over at Penasquito with a deal reached with the National Union of Mine and Metal Workers of the Mexican Republic. And while this will impact profitability going forward given the 8% wage increase, this will not affect Royal Gold which holds a royalty on the asset vs. being the operator.
Royal Gold - 2023 Operator Production Estimate vs. Actuals Year-to-Date - Company Filings
As the table above shows, it wasn't just these three assets that have been affected, with Andacollo's contribution higher in Q3 2023 vs. Q3 2022, but also tracking below guidance, and Cortez tracking to the low end of guidance, another significant contributor for Royal Gold. On a positive note, the Cortez Complex's future remains very bright with massive high-grade intercepts from Fourmile (the next pillar of growth), and Khoemacau was recently acquired by multi-asset operator MMG Limited, with an enterprise value of ~$10 billion and significant experience with large assets globally, and a significant cash flow profile to support a potential expansion to ~130,000 tonnes per annum of copper (8.15 million tonnes per annum vs. 3.65 million tonnes per annum). This would certainly be a positive development (if approved) for Royal Gold, with the company holding a 100% payable silver stream and the possibility of another ~3.0 million ounces of silver production per annum if we see 8.0+ million tonne per annum production rates in the expansion case.
Royal Gold - Quarterly Revenue by Mine - Company Filings, Author's Chart
As for Royal Gold's quarterly revenue by mine, we can see that the Other category increased year-over-year with new contributions from the Cortez CC Zone (1.6% GSR), Rainy River, and King of the Hills [KOTH], and Khoemacau's revenue increased meaningfully to ~$9.0 million with the asset ramping up to full capacity. Finally, we also saw higher revenue from Wharf, Andacollo, Xavantina, Wassa, and Rainy River. Unfortunately, the increase from these assets wasn't enough to offset lower production at its major contributors, with revenue only up 5% year-over-year to $138.6 million despite the higher average realized gold price of $1,928/oz. On a positive note, investors did get a 7% increase in the annual dividend (23rd annual increase in a row) to $1.60 per share despite the difficult year, and its financial results were solid overall even with the weaker than planned sales.
Royal Gold Quarterly Revenue, Cash Flow & Free Cash Flow - Company Filings, Author's Chart
Digging into the financial results a little closer, Royal Gold reported adjusted net income of $49.7 million ($0.76 vs. $0.71), operating cash flow of $98.1 million (+3% year-over-year), and free cash flow of $98.1 million with no major acquisitions in the period. This compared favorably to a cash outflow of ~$583 million in the year-ago due to a busy period with the acquisition of Great Bear Royalties and higher coverage at the Cortez Complex with a $525 million purchase price. The company also noted that it paid down $75 million on its credit facility in the quarter and plans to pay off the remainder of its debt by year-end 2024 ($325 million outstanding) assuming no other major deals. Given the favorable environment with developers and even some producers desperate for cash to survive/grow given less access to debt and weak share prices, I would be surprised if we didn't see more deals though. Finally, Royal Gold exited Q3 with ~$220 million in net debt and ~$770 million in liquidity.
Recent Developments
While the year-to-date results have disappointed (albeit out of the company's control), we have seen positive developments across the portfolio and several royalty assets are getting closer to the finish line and will more than make up for any continued deferrals of silver deliveries at Pueblo Viejo. Let's take a closer look below:
Great Bear
Starting with the Great Bear Project in Canada, Kinross continues to report positive results and noted that it expects to deliver a new resource update at year-end that should result in meaningful growth in the current ~5.02 million ounce resource. To date, underground drilling from the project continues to be quite encouraging, with highlight intercepts well below the planned open pits including 4.6 meters at 5.7 grams per tonne of gold (LP Central), 4.9 meters at 15.57 grams per tonne of gold (LP Central), 4.1 meters at 15.5 grams per tonne of gold (Central/Discovery Gap), and 2.9 meters at 22.33 grams per tonne of gold and 2.8 meters at 259 grams per tonne of gold from the Hinge Zone. These results point to meaningful growth in the underground resource if continuity is confirmed, and this is on top of what is one of the most impressive open-pit assets globally.
Great Bear High-Grade Core & Depth Potential - Kinross Website
As for the opportunity here, Kinross' presentation earlier this year highlighted the high-grade core of the asset which could help with the payback even with a smaller plant (10,000 tonnes per day vs. 15,000 tonnes per day previously envisioned), with the potential for 460,000+ ounces per annum in the first five years (life of mine production of ~370,000 ounces) assuming grades of 4.0+ grams per tonne of gold. And while this won't contribute immediately and commercial production is unlikely before Q1 2030, Royal Gold should see average annual contribution closer to 9,000 GEOs in the early years of the mine life, making this a very nice asset that will deliver ~3% growth vs. the low end of its initial FY2023 guidance (320,000 to 340,000 GEOs).
As for the above image which highlights the high-grade core of the deposit which has shown impressive continuity and is hanging together quite well, there is still significant upside to the deposit at depth below the planned pits and at the Hinge Zone, suggesting this could ultimately be an 11.0+ million ounce resource and 7.0+ million ounce reserve base. So, while Royal Gold may have paid top dollar to get exposure to this asset, the company is effectively paying for the first ten years (~$15 million in revenue per annum x 10), and getting upside if this turns into a Hemlo repeat for free. Notably, the $15 million estimate is based on a $1,950/oz gold price (~78,000 attributable GEOs over first 10 years pays off acquisition), and we could see a quicker payback and much higher return on investment if the gold price averages higher levels such as $2,400/oz to $2,600/oz in the 2030-2040 which is not unreasonable in the slightest looking out seven years to commercial production.
Fourmile
Moving over to Barrick's 100% owned Fourmile deposit in Nevada (sits next to the massive Goldrush Project where small-scale production has begun ahead of the expected ROD), the company hit a massive intercept of ~29 meters at ~51 grams per tonne of gold, making it one of the top-5 intercepts drilled across all Nevada projects since 2021. Notably, this intercept testing for mineralization between Sophia and the Northernmost discovery (Dorothy) suggests the potential to significantly grow the Fourmile resource to the north (shown below). Plus, 400 meters east at the new Anna Marie target, Barrick noted that it has further potential with significant alteration and "many similar geological characteristics to the Fourmile corridor" .
Fourmile/Goldrush & Fourmile Highlight Drill Results - Barrick Website
Given the exploration success, Barrick has not only unveiled a new exploration target of 13 to 20 million tonnes at 13.3 to 20.0 grams per tonne of gold. And even using just below the low point of this figure, this could lift Fourmile's resource from ~3.0 million ounces to 8.0+ million ounces at higher grades assuming 16.0 million tonnes at 16.0 grams per tonne of gold (~8.2 million ounces of gold). This is very positive news for Royal Gold who has increased its royalty coverage on the Cortez Complex because it could potentially contribute an incremental 350,000 ounces long-term to Goldrush. This suggests overall growth to up to 1.50 million ounces at the Cortez Complex at extremely high margins with Goldrush/Fourmile potentially contributing over 50% of this production, pointing to ultimately a longer mine life to give RGLD investors greater visibility into future attributable production, greater exposure to Tier-1 jurisdictions, and much higher cash flow next decade once this asset is developed and makes its way into the current NGM JV.
Ruby Hill
i-80 Gold ( IAUX ) released new drill results earlier this week from Blackjack, with a thick highlight intercept of 116.3 meters at 5+ grams per ton gold-equivalent (10.1% zinc, 0.6% lead, 37 grams per ton of silver and 0.3 grams per ton of gold) or roughly 600 gram-meters, with an additional intercept of 15.5% lead/zinc, 60 grams per ton of silver and 0.2 grams per ton of gold over 16.3 meters. In addition, i-80 hit another solid hole of 16.1 meters at 16.1% zinc, 0.1% lead, 12 grams per ton of silver and 0.5 grams per ton of gold in the southern portion of the deposit. The company also shared that it continues to step out to the south and at depth and it is looking to test the gap between the East Hill top Skarn Zone (300 meters south of Blackjack) and Blackjack, with no drilling between these zones currently and the potential for these two deposits to connect.
Blackjack & Hilltop Zone Drilling & Archimedes Pit - Company Filings
Just as importantly regarding the development of these assets, i-80 Gold announced a non-binding term sheet for a joint-venture at the Ruby Hill Property where it would maintain a majority ownership. This is a positive development for Ruby Hill (Royal Gold 3.0% NSR), which could see a more aggressive exploration budget if a partner comes with an upfront payment to secure partial ownership and shared capex, but also for Granite Creek where Royal Gold holds royalties as this would allow i-80 Gold to also ramp up drilling at other assets vs. being more judicious where it spends as it tries to manage its balance sheet currently. Finally, this cash injection should allow i-80 Gold to attack the Hilltop Corridor, which lies south of the Archimedes Pit, which is shown below for scale and might yield another high-grade carbonate replacement deposit [CRD] on top of the Hilltop Zones directly south of the existing pit.
Ruby Hill Project & Hilltop Corridor - Google Earth, Company Website
So, why is this significant for Royal Gold?
While the Granite Creek royalty contribution is smaller at ~2,000 GEOs given that this asset seems to be capped out at ~80,000 ounces, assuming 800 ton per day mining rates, Ruby Hill could ultimately be a ~300,000 ounce per annum asset in peak years on a gold-equivalent basis, benefiting Royal Gold's 3.0% NSR on all metals. This is because if the asset was developed with a partner, it's certainly possible that the company could look at a 2,500+ ton per day plant for the polymetallic portion of the deposit, which could yield ~200,000 GEOs per annum. Meanwhile, Ruby Deeps is expected to act as a spoke for its autoclave and ~1,300 per day ton mining rates at ~8.0 grams per ton of gold would support another 90,000+ ounces per annum. Therefore, it's certainly possible that this could be an 8,000+ GEO contributor later this decade for Royal Gold in a Tier-1 jurisdiction, which would make this similar in size to other assets set to come online like Great Bear.
To summarize, while this may have been a mediocre quarter for Royal Gold with weaker production from Mount Milligan, no contribution from Penasquito and deferred deliveries from Pueblo Viejo, it was another extremely positive quarter for development/near-term producing assets. This is because Bellevue Gold has poured its first gold at Bellevue (~3,800 GEOs per annum) and is working to ramp up to 1.0 million tonnes per annum (room for further expansion because of its oversized crushing circuit), Goose remains on schedule for Q1 2025 production (~5,500 GEOs), KOTH has seen a material increase in its resource base to ~4.5 million ounces and seen impressive results in grade control drilling (26 meters at 168.15 grams per tonne of gold), and Cote Gold (3,000+ GEOs) plus Granite Creek (2,000+ GEOs) should head into commercial production by Q3 2024, all pointing to growth in GEOs earned and cash flow near-term. And with extremely positive updates at other assets discussed above, RGLD's portfolio has never looked better.
Valuation
Based on ~66 million shares and a share price of $119.50, Royal Gold trades at a market cap of ~$7.89 billion and an enterprise value of ~$8.11 billion. This leaves the stock trading at a P/NAV multiple of ~1.63x vs. an estimated net asset value of ~$4.83 billion, and roughly ~19.1x FY2023 cash flow per share estimates ($6.25). If we look at the stock's historical cash flow multiple, Royal Gold is trading only 15% shy of its long-term average (~22.2x) which might suggest there's a limited margin of safety here. However, 2023 was clearly an abnormal year (Penasquito temporary shutdown, weaker output from Mount Milligan), the gold price is looking like it could average $2,000/oz in 2024, and the company will see multiple assets ramp-up and or start producing next year. So, if we measure against FY2024 estimates of $8.10, RGLD actually looks very reasonably valued, trading at just ~14.8x FY2024 cash flow per share estimates.
Royal Gold - Historical Cash Flow Multiple & Current Multiple - FASTGraphs.com
Using what I believe to be a more conservative multiple of ~23.0x FY2024 cash flow estimates given the continued multiple compression we've seen sector-wide, 1.90x P/NAV and a blended valuation of 65/35 to [P/NAV vs. P/CF], I see a fair value for Royal Gold of $156.00, translating to a 30% upside from current levels. That said, I am looking for a minimum 30% discount to fair value to justify starting new positions in mid-cap royalty/streaming names, pointing to an ideal buy zone of $109.20 or lower for Royal Gold. Hence, although the stock has material upside and I would not be surprised to see it trade at all-time highs in the next year, the stock has moved slightly outside of its low-risk buy zone after its most recent sharp rally.
Summary
Royal Gold's results have underperformed my expectations, but this has been entirely outside of the company's control, with weaker than planned production at several of its key royalty/streaming assets. Obviously, the company can only guide to the production estimates that its partners provide with its own conservatism or views baked in and while the potential to deliver at the low end is disappointing, it's at least nice to see the gold price picking up some of this slack. Fortunately, while 2023 has been a year to forget for production with lower attributable production, 2024 should be a much different year, and especially if the gold price continues to cooperate.
This is because we should see record attributable production just in time for the gold price appearing to have found a new floor near $1,800/oz and hanging out near all-time highs, suggesting a significant increase in cash flow and earnings per share next year and another nice dividend raise on deck (on top of this year's 7%). Meanwhile, investors in Royal Gold have lots to be excited about from an NAV standpoint across the portfolio even if the recent Serrote/Santa Rita deal fell through, with multiple Tier-1 jurisdiction assets outperforming expectations in terms of exploration success. So, for investors looking for low-risk exposure to the gold price, and a consistent dividend grower, I continue to see Royal Gold as a top-10 way to get precious metals exposure at a reasonable price on any pullbacks below $109.20.
For further details see:
Royal Gold: Don't Miss The Forest For The Trees