The critics of Royal Gold have been proven dead-wrong. Nearly a decade has passed since a memorable article appeared in Barron's declaring that shares of Royal Gold (RGLD 2.01%) looked overvalued. The stock cratered by 33% on the day the article appeared, and closed the session at $13.10 per share.
When Royal Gold's shares touched $100 just over a month ago, some investors took a moment to thank gold sage Jim Sinclair -- chairman of Tanzanian Royalty Exploration (TRX 2.14%) -- for defending Royal Gold at the time with his fully vindicated rebuttal. Of course, we can now state most emphatically that Royal Gold was not overvalued at the time, and presently I would like to point out that the stock still has plenty of room to run within the ongoing bull market for gold.
Growth from producing assets
Royal Gold delivered earnings this week for its fiscal first quarter of 2013, which featured record royalty revenue of $77.9 million. That's an impressive 21% surge over the prior-year mark despite a 3% dip in the average realized gold price! The company's golden trio of cornerstone mines each contributed to the bonanza.
- Teck Resources' (TCK +1.52%) achieved record output at its Andacollo copper mine with the addition of a pre-crushing circuit.
- In an achievement I celebrated here, Goldcorp (GG +0.00%) recorded terrific production results at Peñasquito despite an ongoing scarcity of water for the mill.
- And Vale's (VALE 1.85%) Voisey's Bay mine came through with increased volume of copper concentrates to chip in for 12% of Royal Gold's first-quarter-royalty income.
Together, these three cornerstone assets accounted for more than half of the company's consolidated income, and investors looking to project long-term-cash-flow expectations for the company need to pay special attention to these mines. I happen to own all three of the above mining stocks, and encourage readers to track my ongoing coverage by bookmarking my article list or following me on Twitter.
Looking forward, Royal Gold President and CEO Tony Jensen expects "further incremental production increases from Andacollo, Peñasquito, and Canadian Malartic in the coming quarters." I also own shares of Osisko Mining (NASDAQOTH: OSKFF.PK) for exposure to the ongoing ramp-up of its Canadian Malartic mine, and I share Jensen's outlook for looming production growth from each of those three.
Organic growth from currently non-producing assets
Royal Gold does have some tangible growth to look forward to within its existing portfolio of producing royalties, but the real growth story comes from assets that have yet to enter production and the deals that have yet to be signed. Dominating the first category is the phenomenal Mt. Milligan copper and gold mine, in which Royal Gold holds a stream deal covering 52.25% of gold production over the life of Thompson Creek Metals' (TC +0.00%) emerging flagship operation. Royal Gold's share will correspond to roughly 136,000 attributable ounces per year in the early going, before scaling back to a long-term average of about 102,000 gold ounces over a 22-year mine life.
Commercial production at Mt. Milligan is scheduled to begin toward the end of 2013, with the resulting expectation for roughly $157 million in additional annual EBITDA beginning as early as 2014 (using current gold prices). Relative to the $71 million in EBITDA reported for the fiscal first quarter, the Mt. Milligan gold stream alone would represent roughly a 55% increase in quarterly EBITDA! By 2014, however, I see a very strong likelihood that gold will trade well beyond $2,000 per ounce, requiring a nice upside adjustment to those EBITDA projections. Some may disagree with that bullish gold price scenario, but fair warning: They may be some of the same folks who considered Royal Gold overvalued at $18 per share!
Mt. Milligan may be the golden nugget in Royal Gold's development-stage asset portfolio, but it's not the only one. Barrick Gold's (ABX 1.55%) Pascua Lama project will likely enter production sometime during the second half of 2014, and Royal Gold suffers no distress from the major cost escalation that has characterized the project to date. That's part of the beauty of these mine royalty and streaming business models, and a major factor in the incredible outperformance of Royal Gold and its peers over both gold itself and the mining stocks at large over the past several years.
Growth in the deals that have yet to be signed
With more than $1 billion in available liquidity to work with, Royal Gold is very well-positioned to ink further accretive royalty or streaming deals during this opportune moment when multiple mine developers face a difficult task in raising construction capital within a constrained credit environment. With strong and growing cash flows, in fact, the entire royalty and streaming group is on a sound footing to forge further strategic growth going forward. I have focused my own investment interest upon Sandstorm Gold (SAND +0.00%), but ultimately I believe that Sandstorm, Franco-Nevada (FNV +1.01%), Silver Wheaton (SLW 1.43%), and Royal Gold will all share in a continuum of celebrated profit growth that will continue to confound critics, while heaping profits upon savvy long-term investors.
