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Will 2018 Be Royal Gold, Inc.'s Best Year Yet?

By Maxx Chatsko - Dec 14, 2017 at 8:12AM

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The gold stock is coming off its best year ever, so there's a high bar to top.

Royal Gold (RGLD 3.25%) turned in its best year yet in fiscal 2017. The leading gold-stock achieved record levels of revenue, net income, and operating cash flow for a full-year period, thanks to a business model that generates high-margin revenue from owning interests in gold and silver mines around the globe, but not the mines themselves. 

Wall Street is loving the performance. The stock is trading near all-time highs. The annual dividend payout was recently increased. It's certainly a good time to be Royal Gold shareholder. But don't make the mistake of thinking things couldn't get even better.

Given the recent start-up of a massive gold and silver mine in Canada, it's not completely out of the question that Royal Gold turns in its best year yet in 2018. Topping last year's epic performance will be a little more difficult after a sluggish fiscal first quarter, but the bar can still be cleared.

A businessman touching a screen with bar charts displayed on it showing growth.

Image source: Getty Images.

One for the record books

Royal Gold didn't just post its best year ever in fiscal 2017 -- it absolutely crushed all prior performances: 

Metric

Fiscal 2017

Fiscal 2016

Change (YOY)

Revenue

$440.8 million

$359.8

22.5%

Operating income

$145.9 million

$4.8 million

$141.1 million

EPS

$1.55

($1.18)

N/A

Data source: SEC filings. YOY = year over year.

Net income took a blow in fiscal 2016 due to the timing of major tax hit, but that wouldn't have changed the fact last year was the company's best year yet. But there is something that could dethrone 2017 in the record books: the recent opening of the Rainy River mine in Canada.

Mining company New Gold operates the asset, but Royal Gold will purchase 6.5% of gold production up to the first 230,000 ounces and 60% of silver production up to the first 3.1 million ounces. It will purchase half of each stream after those minimum levels of delivery. 

Rainy River is, simply, poised to be a game changer for Royal Gold. Sure, the gold stream won't be very impressive. At just 15,000 ounces, it would only round out the top five principal producing properties reported by the company. The silver stream, on the other hand, is what investors should be excited about. At 1.86 million ounces, it would more than double the company's fiscal 2017 silver streaming interests, which settled at 1.6 million ounces. 

It's all part of a plan to diversify revenue -- something that is sorely needed. In fiscal 2017 Royal Gold relied on gold and silver for 85% and 8% of its revenue, respectively. The company expects to receive its first deliveries by the end of the calendar year. While that should easily boost this fiscal year's financial performance, shareholders shouldn't get too overconfident. 

Streamin' ain't easy

A difficult start to fiscal 2018 demonstrated that even streaming companies cannot fully escape the risks inherent to mining. Royal Gold reported a 5% drop in year-over-year revenue thanks to a steep decline in its gold-streaming interests at Centerra's Mount Milligan mine, which dropped to 35% from last year's 52.25%. Total streaming revenue fell 8% as year-over-year production dipped at three of the four principal production mines. 

Was the minor drop-off significant in the grand scheme of things? Hardly. However, it does highlight an important reality of the mining industry. That is, gold miners are constantly faced with declining rates of production, which makes new projects aimed at growth really just projects needed to maintain a certain level of financial performance. Royal Gold is better insulated against these risks than mine owners and operators, but not completely immune.

The good news is that, for now at least, the massive Rainy River mine promises to deliver real growth for the foreseeable future. That should have investors relatively confident that the new asset can offset losses from elsewhere in the streaming portfolio, and that fiscal 2018 will be Royal Gold's best year yet.

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