Streaming Prospects for Royal Gold

12/04/2020 5:00 am EST

Focus: COMMODITIES

Adrian Day

Chairman and CEO, Adrian Day Asset Management

Royal Gold (RGLD) had a somewhat mixed quarter, with revenues and operating cash flow increasing, though less than expected. The balance sheet improved significant; this was the second quarter of net cash, jumping from under $10 million to $138.1 million, observes Adrian Day, editor of Global Analyst.

Overall, Royal’s revenues are currently 79% from gold; it is well diversified with 88 properties in 12 countries. With its stronger balance sheet, the company has firepower for additional acquisitions.

At quarter end, Royal Gold held inventories of nearly 26,000 ounces, up from nearly 19,000 at the end of last quarter. Production, however, remains disappointing.

Gold-equivalent sales remain down almost 11% from the first quarter of the year, and remain lower than any quarter since 2015. (Royal’s fiscal year ends in June; I am referring to calendar quarters.)

The production decline is attributable primarily to two of its largest royalties and streams — Mount Milligan in British Columbia, as well as Andacollo in Chile.

Future growth and better valuations make Royal attractive again. Two major contributors to future growth are progressing well.

The Khoemacau mine in Botswana is 70% constructed with first shipments expected in the third quarter of next year.  Royal paid another $44 million in advance payments under the silver stream arrangement. Meanwhile, Barrick Gold (GOLD) continues on its mine expansion at Pueblo Viejo in the Dominican Republic.

As the stock price has declined since August (from a peak of $145) and revenues have increased, valuation has improved. At a little over 3 times book, it is lower than its peers, though still at a 10-year high. But on a cash flow metric, at 20 times, it is near the low end of its historic range and well below its peers.

With an improved balance sheet, and growth over the next couple of years, Royal is now a buy again. There is no need to chase the stock price, and if the gold price declines further, there is risk in Royal’s price down to the $90 level. Nonetheless, if you are underinvested, it can be bought again.

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