Progress in Mines to Aid Royal Gold Amid Water Supply Woes

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On Aug 21, we issued an updated research report on Royal Gold, Inc.RGLD . The company is poised to gain from improved production and progress in new mines. Its focus on acquisitions and strong cash flow position also bode well. However, inadequate water supplies and lower processing rates at Mount Milligan might impede the company's near-term growth.

Let's illustrate the factors in detail.

Progress in Mines to Drive Growth

For fiscal 2019, Royal Gold expects improved results backed by several positive catalysts, including the commencement of production at Cortez Crossroads, early deployment of the Peñasquito Pyrite Leach Project and production improvements at Rainy River. Rainy River has demonstrated the ability to improve throughputs, which is expected to increase to 24,000 tons per day by the fourth quarter of calendar-year 2018.

Notably, the company believes Golden Star Resources Ltd. GSS has the potential to expand the Wassa Underground mine to meet the mill's capacity. Golden Star has reiterated its gold production guidance of 230,000-255,000 ounces for calendar-year 2018. At Penasquito, Goldcorp Inc. GG reported that construction of its Pyrite Leach circuit is complete. Goldcorp expects first gold production from this circuit later this calendar year, and anticipates that the project will add an incremental 100,000-140,000 ounces of gold and 4-6 million ounces of silver annually over the mine life.

Acquisitions to Aid Royal Gold's Revenues

This June, Royal Gold entered into an agreement to purchase a 1.75% Net Smelter Return (NSR) royalty on Amarillo Gold's Mara Rosa gold project in Goias State, Brazil, for $10.8 million. The acquisition is in addition to the 1.00% NRS royalty on the Mara Rosa project. Furthermore, the company acquired 682,556 shares of Contango ORE, Inc. in June, for $26 per share. Royal Gold expects to acquire a second and final tranche of 127,188 shares of Contango during first or second-quarter fiscal 2019. The company expects to acquire more companies that hold stream and royalty interests. These acquisitions will drive revenues.

Strong Cash Flow Position to Boost Results

Royal Gold remains focused on allocating its strong cash flow to dividends, debt reduction and new business. The company has paid $64 million in dividends during fiscal 2018. It also reduced its debt for the sixth straight quarter by paying down another $75 million and there is no outstanding amount under its revolving credit facility. The company now has more than $1 billion of total liquidity for new opportunities.

Inadequate Water Supplies at Mount Milligan a Concern

At Mount Milligan, Centerra had temporarily suspended mill operations due to insufficient fresh water at the end of December 2017. Due  to  the  timing  of  shipments  and  deliveries  of  gold  and  copper, Royal Gold expects the impact of the temporary shutdown to be reflected in the first-quarter fiscal 2019 results, as some of the deliveries of gold and copper expected in the June-through-August 2018 period have been deferred to a later date.

Further, the Mount Milligan mill will operate only one ball mill to conserve water, and throughput would be reduced to approximately 30,000 ton per day for the December 2018 quarter, if it does not receive regulatory approvals for additional short-term water sources through 2020. Moreover, Centerra reduced the calendar-year 2018 production guidance at Mount Milligan to 175,000-195,000 payable ounces of gold and 40-47 million payable pounds of copper.

Share Price Performance

Royal Gold's shares have outperformed the industry it belongs to, over the past year. Its shares have depreciated around 10%, while the industry recorded loss of 23% during the same time frame.

Zacks Rank & Stocks to Consider

Currently, Royal Gold carries a Zacks Rank #3 (Hold).

A better-ranked stock in the same sector is Celanese Corporation CE which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Celanese has a long-term earnings growth rate of 14%. The stock has rallied 20% in a year's time.

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Celanese Corporation (CE): Free Stock Analysis Report

Goldcorp Inc. (GG): Free Stock Analysis Report

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Golden Star Resources, Ltd (GSS): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Symbols: CE , RGLD , GSS

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