Royal Gold, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Royal Gold is a precious metals stream and royalty company, not a mining operator itself, providing upfront financing to mining operations in exchange for a portion of their future metal production or sales revenue.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Royal Gold (RGLD) doesn’t operate mines but instead finances them. In exchange for an up-front payment, the company acquires the right to a share of the metals produced by the mine or royalties on its revenue. The company doesn’t have any operating costs, just a small team that manages the legal and financial aspects of the business, and receives a percentage of cash flow with no further operational burdens after providing the initial financing.

  • Revenue Distribution: RGLD generates revenue through two main channels:
    • Stream Revenue: This is tied to production volume, where Royal Gold buys a portion of the mine’s metals at a pre-agreed price.
    • Royalty Revenue: This is a percentage of revenue that RGLD receives when a mine produces metals and sells them (usually a small cut of the gross sales).
  • Industry Trends: The precious metals industry is subject to fluctuating commodity prices, making forecasting profits difficult. Economic cycles, government regulations, and geopolitical events all play a part in this industry, which makes it quite volatile. The recent trends show a focus on responsible mining practices and a rise in demand for battery metals (like copper, silver, and some rare earth elements).
  • Margins: RGLD enjoys high gross and operating margins, due to the relatively low overhead of their business model. Since they’re not involved in mining operations they do not have as much of the operating cost which has made them very profitable in certain years with higher metal prices.
  • Competitive Landscape: RGLD is one of only three significant companies (Franco Nevada and Wheaton Precious Metals being the other two) that finance mining projects in exchange for streams and royalties on precious metals, making the industry highly consolidated. There are other smaller players, especially in the royalty segment of the market. Competitors are most of them private-equity firms and smaller investment houses that do not have the access to the capital or the long and established relationships that they have.
  • What Makes RGLD Different: The company’s business model allows for greater stability. Unlike direct mining companies, Royal Gold is not involved in the daily operations of any mine but instead provides capital and extracts payments based on the operation of the mine. This leads to lesser risk, and better cash flow consistency, as they only receive the agreed-upon payment irrespective of how the operating company is performing (as long as it is still operational). They also have strong geographical diversification as they operate in 28 different countries in North America, Latin America, Australia, and other parts of the world.

  • Financials (In-depth Analysis): A good way to get a better perspective of this company is to look at the financials. First let’s check how the company did in their latest financials. They have recently released their financials for the quarter ending June 30, 2023, and the details of it are as follows:

    • The company reported net income of $59.3 million for the three-month period, ending in June 2023 compared to $98.5 million in 2022. This decline in income was primarily driven by several factors, including lower gold and silver prices, lower cost of goods sold for some royalty assets, increased tax expense and higher exploration costs for their operations.
    • Their revenue for this quarter was $148.7 million compared to $158.5 million last year. This is a decrease of 6.2% year over year.
    • In terms of the balance sheet, they had total cash and cash equivalents of $103.7 million and a total of $2.46 billion of total assets. Their total debt was reported at about $661.3 million.

    • While looking at their cash flow statements, cash flow from operations came in at $68 million for this quarter. Total debt was $661.3 million, which is down from $772.4 million last year, driven by scheduled repayments.

    • In the latest earnings call the management stated that their strong balance sheet and free cash flow position would allow them to pursue new investment opportunities to further increase their cash flow.
  • Historical Financial Performance: Looking into historical performances, the net revenue has trended well from 2004, going from about 54 million USD to about 580 million in 2022, a CAGR of about 13%. Their Free Cash Flow also has a good trend throughout time but varies because of the lumpy nature of their investment. Their return on invested capital is quite consistent, and a big part of why they have a moat.
  • Recent Concerns and Controversies:
    • The main concern that the company and its investors are facing is the short-term volatility of the metal market, both for gold and for silver. However, the company has stated that their diversified revenue base, and their low debt exposure, along with high profit margins, will provide them with sufficient runway to withstand any market fluctuations.
    • They are also planning to add more diversification to their portfolio in the coming years. The goal is to be able to balance their portfolio with production-stage assets and longer-term growth assets.

Moat Assessment: 2/5 While Royal Gold benefits from some factors, it’s hard to argue for a strong moat rating because of high exposure to commodity prices.

  • Intangible Assets: RGLD does not necessarily benefit from a strong brand name, as they do not have any consumer-facing products. Most of the revenue comes from providing capital and getting a certain royalty or percentage of cash flow based on commodity price performance. They do not have long-lasting patents that protect their investments either and their main competitive advantages seem to come from intangible contracts and legal agreements.

  • Switching Costs: There are virtually no switching costs for their partners. If the company’s partner believes they can get better rates from another company, nothing stops them from doing so after their contracts expire, leading to an uncertain customer base.

    • Network Effects: This business does not benefit from a network effect. They are a capital provider and, as such, do not have network economics that can create higher profitability with the greater volume.
    • Cost Advantage: RGLD does have some cost advantages through low operating costs as they don’t operate the mining assets but instead have streamlined management focused on managing assets and investment. This gives them a slight cost advantage over miners or other financial institutions with higher overhead.
      • But it is worth noting that other new entrants can replicate this cost advantage.

Risks to the Moat and Business Resilience

  • Commodity Price Volatility: This is the biggest factor impacting their financial health. Volatility will always be present in the market as the metal prices are subject to influence by various factors, including economic growth, geopolitical instability, and changes in monetary policies, all of which will greatly affect revenues and their cash flows. This is also compounded by a dependence on commodity prices because they don’t have a lot of power in negotiating prices with their partners.
  • Geopolitical Risk: A substantial portion of their assets are in emerging countries in Latin America, Africa, and Asia. Any political instability could cause serious harm to their revenue stream. For instance, if a company has political risks in a certain country and the host country raises taxes and royalties on mining activities, RGLD’s profitability will drop, while the company might not get any compensation for the loss of revenue. They would also find it difficult to rebalance their portfolio with assets from other stable countries.
  • Partner’s Operational Risk: RGLD relies heavily on its partners to operate the mine successfully. If the mines they finance suffer from operational problems or higher extraction costs, RGLD’s revenue will obviously decline.
  • Changes in Regulations: If there are changes in mining-related regulation and licensing requirements, their profitability may be negatively impacted because they would have to pay higher taxes and royalties to continue operation.

Understandability Rating: 3/5 While RGLD’s business model is fairly easy to explain and comprehend, figuring out the complicated financial structure associated with royalty and streaming companies makes it harder to understand. They have many different projects, each with specific clauses and conditions, adding to the complexity.

Balance Sheet Health: 4/5 RGLD’s balance sheet is good. The company has adequate liquidity with a high cash position relative to its debt levels. The debt repayment has improved their credit and is not a significant risk for the business. The net debt-to-capital ratio is at 0.30, which makes their financing quite safe and their operational ability to weather adverse market conditions quite strong.