Why Royal Gold’s Rally Could Be in Danger

Royal Gold [stock_market_widget type="inline" template="generic" color="default" assets="RGLD" markup="(NASDAQ: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] is different from traditional mining companies because it buys streams of precious metals from miners that produce such metals as by-products. Typically, the purchase agreements struck by streaming companies such as Royal Gold are in exchange for an upfront payment and a price per ounce that’s ideally substantially lower than the actual price of such metal.

Unsurprisingly, shares of Royal Gold have taken off over the past six months, rising more than 21% on the back of improved gold prices. However, a closer look at the company’s operations makes it clear that the company is facing a few headwinds that need to be addressed, or its rally could be in danger going forward.

A Closer Look at the Problems

According to Royal Gold’s fiscal second-quarter report for the quarter ending Dec. 31, 2018, revenue was down 14.6% annually to $97.6 million. Royal Gold’s volume dropped 11.3% to 79,600 gold equivalent ounces during the quarter, while the average realized price of gold fell 3.8% to $1,226 an ounce, leading to a steep drop in the company’s top line.

Also, the lower pricing and volumes impacted Royal Gold’s operating cash flow, which fell 22% annually to almost $59 million last quarter. The company blamed lower gold stream sales from the Pueblo Viejo and the Andacollo mines. Also, lower production at the Cortez and Penasquito mines led to lower royalty revenue from those mines.

Moreover, Royal Gold’s challenges are far from over as it will continue facing a few headwinds at mines such as Mount Milligan.

More Challenges Ahead

Mount Milligan’s gold production last year stood at nearly 195,000 ounces of gold as there were ample water resources at the mine. However, there might not be sufficient water supply available at the mine in 2019. The water supply was constrained during the winter season, though the mine operator believes that the supply will be back to sufficient levels once the ice melts during the spring.

Still, production at Mount Milligan in 2019 will be in the range of 155,000 ounces to 175,000 ounces. The mid-point of that range is 15% lower than last year. However, there are a few catalysts that could boost Royal Gold’s operational profile.

According to analysts, things are not looking great for Royal Gold right now as its top line is expected to take a hit to the tune of 3%.

The company recently struck a silver streaming agreement with Khoemacau Copper Mining for delivery of 1.5 million ounces of copper annually at a stream rate of 80%. The deliveries are expected to begin in the first half of 2021.

Meanwhile, the operator of the Mount Milligan mine, Centerra, has requisitioned for additional sources of water for the next two and a half years in order to keep throughput at the mine in good shape. But it remains to be seen if that actually materializes.

According to analysts, things are not looking great for Royal Gold right now as its top line is expected to take a hit to the tune of 3%. Its earnings are expected to decline from $1.76 per share last year to $1.64 per share this time.

So, Royal Gold investors should wait for concrete signs of a turnaround at the company before going long as it has some issues to sort out.

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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