Should You Buy Royal Gold Stock’s Pullback?

Mining Company IAMGOLD's (IAG) production guidance shows it likely won't capitalize on rising gold price.

Royal Gold [stock_market_widget type="inline" template="generic" color="default" assets="RGLD" markup="(NASDAQ: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] stock has flown higher in recent months as the gold price rally has gained momentum. But the recent pullback in the price of the yellow metal seems to have spooked investors who have sold Royal Gold stock and booked their profits.

Now, is the recent pullback in Royal Gold price an opportunity to buy more shares? Let’s find out.

A Turnaround Is in the Cards

With gold around $1,500 an ounce, Royal Gold could deliver a stronger financial performance in the future thanks to the efforts it is taking to boost production.

Royal Gold’s second-quarter financial results were disappointing. The company reported a small drop in its revenue as compared to the prior-year quarter to $115.7 million while operating cash flow was down 6% to $72.3 million. For the full year, Royal Gold reported $423 million in revenue. The company’s full-year revenue was also lower than the fiscal 2018 figure thanks to lower streaming revenue, which was triggered by weak metal prices.

For the fourth quarter, Royal Gold delivered a flat volume of 88,400 gold equivalent ounces when compared to the prior-year period. But more importantly, Royal Gold witnessed an average realized gold price of $1,309 an ounce during the quarter, which was slightly higher than the year-ago period.

With the spot price of gold now hovering around $1,500 an ounce, don’t be surprised to see Royal Gold deliver a stronger financial performance in the future thanks to the efforts it is taking to boost production.

Positives to Consider

Royal Gold’s streaming production took a hit last year thanks to the bottlenecks faced by Centerra Gold at the Mount Milligan mine on account of a water shortage. But things seem to be getting back on track now.

Royal Gold says that Centerra is now able to access water from the new sources and milling operations at the mine had reached their full capacity in early May. So Royal Gold should witness an uptick in its streaming ounces thanks to the improving conditions at the Mount Milligan mine.

More importantly, Royal Gold is working to increase its productivity in the long run, which is why it added a new silver stream in the Khoemacau Copper Project in Botswana. Deliveries from this mine are still a couple of years away, so the impact won’t be instant. But the project’s long mine life of 21 years should be a tailwind for Royal Gold’s long-term output.

Finally, the company is taking steps to streamline its balance sheet. In the recently concluded fiscal year, Royal Gold reduced its debt to the tune of $136.5 million. At the same time, its cash position increased by $30.7 million.

Royal Gold is taking the right steps to increase production and strengthen its books at the same time. But investors should wait further before buying the stock as it is expensive from a valuation point of view. With a forward price-to-earnings ratio of 50, it would make sense to buy the stock when it gets cheaper.

As such, investors should look for further pullbacks in Royal Gold price before going long.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.

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