Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Is Royal Gold Inc on the Right Track?

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Royal Gold  (NASDAQ: RGLD  ) has made several decisions in the past several months that could increase its output. Is this the right course of action for the company, and are there any threats to this new production?

2014 output
Royal Gold entered into a handful of new royalty and streaming agreements early this year, including a 1% royalty from Barrick Gold's (NYSE: ABX  ) Goldrush deposit in Nevada, royalty interests in Barrick's Cortez gold mine in Nevada, and a $75 million gold-stream agreement with Rubicon Minerals to finance the construction of the Phoenix gold project in Ontario, Canada. These projects are likely to improve Royal Gold's production in 2014. 

Besides new mines, the company also estimates several of its mines will increase their production this year, specifically the Peñasquito mine -- Royal Gold's collaboration with Goldcorp (NYSE: GG  ) . Even though this mine's gold production remained nearly unchanged in the past couple of years, at around 400,000 ounces, in 2014 Goldcorp projects mining in the higher-grade portion will continue.

Moreover, throughput of 110,000 tons per day is projected to be added in 2014. As a result, gold production is estimated to rise to 545,000 ounces -- a nearly 38% increase year over year. Also, Royal Gold last year purchased a mine in Mt. Milligan. The company already received 2,149 ounces of gold in the first quarter of 2014 from this mine and expects the stream will rise in the coming quarters. 

Despite these encouraging figures, several mines including Andacollo are expected to further reduce their production. Such mines could offset the rise in production from Peñasquito, Mt. Milligan, and the new purchases. 

But if the company continues to purchase new projects in the coming months, its total production is likely to rise on a yearly scale. After all, the company has a working capital surplus of $704.8 million, a current assets-to-liabilities ratio of nearly 30 to 1, and $450 million under its revolving credit line. This means the company has more than enough funds to purchase new projects. 

Production threat
One company that could slow Royal Gold's production increase is Barrick Gold. Barrick's financial problems have resulted in the company reducing its capital expenditures and production. Specifically, Barrick Gold decided to temporarily suspend construction activities at Pascua-Lama. Royal Gold holds a royalty contract on the Chilean side of the Pascua-Lama project. Even though Royal Gold doesn't have any capital or other production costs with this project, Barrick Gold's decision might delay the royalty payments to Royal Gold. 

If Barrick Gold decides to reduce its production in other projects, this could also lower Royal Gold's royalty payments in 2014. 

Silver Wheaton (NYSE: SLW  ) is also facing similar problems with Barrick Gold. Due to Barrick Gold's decision vis-a-vis Pascua-Lama, Silver Wheaton updated its production guidance so that the mine will start to produce in late 2017 and not in December 2016. In exchange for this delay, Silver Wheaton will receive silver from Barrick Gold's other mines.

Thus, even though this decision won't affect Silver Wheaton's silver stream, this raises the possibility of Barrick Gold being unable to complete the construction of Pascua-Lama, which could make the deals with Royal Gold and Silver Wheaton void. 

Bottom line
Royal Gold is plausibly among the stronger investments to consider for investors seeking precious metals exposure. The company is taking great strides to increase its production with new projects, but investors should also consider the potential decline in production related to some of Royal Gold's mines and the potential delays related to Barrick Gold's mines.

The Motley Fool's stock of the year
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2859704, ~/Articles/ArticleHandler.aspx, 8/30/2015 8:36:28 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Lior Cohen

Lior has been a contributor for the Fool since 2012. His main interests are in commodities, and energy and materials companies.You can follow him on Twitter to stay up to date with his industry analysis. @tradingnrg

Today's Market

updated 1 day ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:00 PM
ABX $7.13 Up +0.29 +4.24%
Barrick Gold Corp. CAPS Rating: ***
GG $13.96 Up +0.28 +2.05%
Goldcorp, Inc. (US… CAPS Rating: ***
RGLD $48.94 Up +0.92 +1.92%
Royal Gold, Inc. CAPS Rating: ***
SLW $12.39 Up +0.39 +3.25%
Silver Wheaton Cor… CAPS Rating: ****