Royal Gold Strong On New Mines & Buyouts, Gold Prices A Woe

On Mar 18, we issued an updated research report on Royal Gold, Inc. (NASDAQ:RGLD) . The company expects to benefit from the ramping up of new mines. Focus on acquisitions and strong balance sheet also bode well. However, lower gold prices remain a concern.

Royal Gold’s shares have gained around 8% over the past year, outperforming the industry’s growth of 4.2%.

Peak Gold Project Holds Promise

Royal Gold announced that the Peak Gold joint venture, in which its subsidiary Royal Alaska holds a 40% interest, has completed a Preliminary Economic Assessment (PEA) on the Peak Gold Project located near Tok, Alaska. The company is focused on maximizing the value of interest in this project.

Settlement of Voisey’s Bay Dispute a Positive

Royal Gold has settled its long-standing litigation with VALE S.A (NYSE:VALE) over the world-class Voisey's Bay mine in Newfoundland and Labrador. Vale will invest $1.7 billion to develop underground resources which will extend the mine life from 2023 to 2034.

The settlement provides Royal Gold the exposure to a world-class operating asset that ensures its shareholders a steady stream of royalty revenues. The company expects Voisey's Bay to feature among its top 10 revenue generators.

Other Growth Drivers in Place

There are other several positive catalysts for the company, including the commencement of production at Cortez Crossroads, early deployment of the Peñasquito Pyrite Leach Project and production improvement at Rainy River. Long-hole drilling at Wassa and Prestea mines will likely continue which will support production in fiscal 2019. Royal Gold is focused on allocating its strong cash flow toward dividend payouts, debt reduction and new businesses.

On Feb 25, Royal Gold and its wholly-owned subsidiary RGLD Gold AG entered into a silver mine life purchase agreement with Khoemacau Copper Mining Limited (“KCM’’) — subsidiary of Cupric Canyon Capital LP. The agreement highlights the purchase and sale of silver, produced from the Khoemacau Copper Project in Botswana. Royal Gold estimates silver deliveries of 1.5 million ounces per annum at 80% stream rate, with initial deliveries probably starting in the first half of calendar 2021. The transaction will be funded in cash and $1 billion available under a revolving credit facility.

Lower Gold Price & Water Supply Issues Hurt Royal Gold

Revenues in the second-quarter fiscal 2019 (ended Dec 31, 2018) declined year over year due to lower average gold, silver and copper prices, as well as a drop in overall sales and production. Sales performance was also impacted by reduced sales at Mount Milligan. This was mainly caused by rail transportation issues experienced last July. The temporary shutdown of the mill processing facility in the beginning of calendar 2018 resulted from a lack of sufficient water sources.

Centerra has submitted an application to authorities to allow water withdrawal from a number of other sources at rates that are protective of the environment until September 2021. It expects to reduce Mount Milligan throughput to properly manage its water balance until water flow increases in the spring of 2019. Further, the currently-approved sources will provide limited amount of water in the near term, and there is no guarantee for the sufficiency and availability of additional water sources, adding to concerns. Consequently, Centerra is trying to reach a long-term water solution. Moreover, volatile gold price environment remains a concern for Royal Gold.

Royal Gold, Inc. Price and Consensus

Zacks Rank and Stocks to Consider

Royal Gold currently carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the Basic Materials sector are Ingevity Corporation (NYSE:NGVT) and Innospec Inc. (NASDAQ:IOSP) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Ingevity has an expected earnings growth rate of 17.9% for 2019. The company’s shares have rallied 40.2%, over the past year.

Innospec has a projected earnings growth rate of 3.5% for the current year. The stock has appreciated 18.8% in a year’s time.

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