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Here's Why Royal Gold Popped 16% in May

By Scott Levine – Jun 9, 2017 at 12:25PM

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Beating analysts' estimates by $0.05, the company reported earnings per share of $0.36, but investors had plenty of other causes for celebration.

What happened

Royal Gold (RGLD -1.20%), a leader in precious metals royalties and streams, rose a meager 0.6% through April, but May proved to be much kinder. Shares jumped more than 16% through the month, fueled by a strong third-quarter 2017 earnings report.

So what

Besides flat quarter-over-quarter revenue growth, Royal Gold's Q3 earnings report revealed that the company incurred greater operating expenses and recognized a decline in net income. Whereas it reported $28.1 million on the bottom line during the second quarter, net income dropped to $23.7 million in the recently completed third quarter. However, this blemish on the income statement wasn't enough to detract from the company's achievements in the quarter.

Gold bars rest atop one-hundred-dollar bills.

Image source: Getty Images.

Turning from the income statement to the company's cash flow, we find some of the cause for the bullish sentiment surrounding the stock: record operating cash flow. Whereas the company generated $66.1 million in cash from operations in Q3 2016, it reported $76.1 million in this past quarter. Granted, the higher price of gold -- about 3% higher in Q3 2017 -- contributed to the improvement, but management also attributed the increase in cash flow to a year-over-year increase in revenue at several operating properties: Mount Milligan, Pueblo Viejo, Penasquito, Wassa, and Prestea.

Lastly, the company's stronger balance sheet likely encouraged investors' optimism as well. Besides completing its scheduled repayments to Golden Star for the gold streams at the Wassa and Prestea mines, Royal Gold effected $45 million in debt repayment in the quarter. Moreover, the company has no additional funding requirements moving forward.

Now what 

With one of its most successful quarters in the rearview mirror, Royal Gold attempted to reassure investors in its earnings presentation that even better days remain ahead of it, citing "sequential growth catalysts" in each of the next three calendar years: the commencement of gold production at Rainy River in 2017, completion of the Crossroads project at Cortez in 2018, and completion of the Pyrite Leach Project at Penasquito in 2019.

In addition to monitoring the execution of these projects, investors can watch for developments at Pascua-Lama, where Barrick Gold recently announced a partnership with Shandong Gold to explore development of the beleaguered Chilean mine. If Pascua-Lama resumes operations, it could be of great significance to Royal Gold, which has a 5.45% royalty on all gold production from the Pascua side of the mine. Royal Gold's management contends that if Pascua-Lama were operating today, it would represent the company's fourth largest source of revenue.

Scott Levine has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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