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Is Royal Gold Inc on the Right Track?

By Lior Cohen – Mar 4, 2014 at 4:04AM

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Will Royal Gold increase its production in 2014?

Royal Gold (RGLD 1.24%) 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 (GOLD 0.32%) 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 (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 (WPM 0.06%) 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.

Lior Cohen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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