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2009 August RGLD Contrarian Comprehensive

2009 August RGLD Contrarian Comprehensive

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Contrarian Research Report
 
 August 6, 2009
 
This report is based on information available to the public; no representation is made with regard to its accuracy or completeness. This document is neither an offer nor a solicitation to buy or sell securities. All expressions of opinion reflect judgment at this date and are subject to change. Horizon Research
 
Group and others associated with it may have positions in securities of companies mentioned. Reproduction of this report is strictly prohibited. © Horizon Research Group, 2009.
Royal Gold, Inc.
(BUY)
 
Price:
$41.48
Ticker:
RGLD
52-wk. range:
$49.81 - $22.75
Dividend: $
0.32
 Shares out.:
40.7 million
Yield:
0.80%
 Market Cap.:
$1.7 Billion
Horizon Research Group
Steven Bregman Naveen Kumar Thérèse Byars David LeibowitzPeter Doyle Eric SitesMichael Gallant Fredrik TjernstromMatthew Houk Steven TuenMurray Stahl
Exclusive Marketers of The Contrarian Report 
 PCS Research Services125 Maiden Lane
th
Floor New York, NY 10038(212) 233-0100www.pcsresearchservices.com
 
The Contrarian Research Report
© Horizon Research Group, 2009 Page 2
 
The Contrarian Research Report
© Horizon Research Group, 2009 Page 3
Investment Thesis
Royal Gold is not a gold miner; it is a purchaser of interests in the gold mines of other goldminers. As such, it receives income streams from its royalty interests in gold (and silver)mines. Essentially, the company buys a share of production at the discounted present valueof the cash flow over the life of the mine which, in many cases, exists over decades. RoyalGold has invested in mines located in the US, Canada, Mexico, Chile, Argentina, Bolivia, Nicaragua, and West Africa. Also, much like a venture capital company, Royal Gold’sinterests can be found in a wide spectrum of mines, from well-established mines that haveresources, reserves and actually produce gold to more speculative investments in minesthat have no proven reserves, just resources. Presumably, the newer mines will reach production at some point in the future and, thereby, offset depletion experienced in themore mature mines and result in substantial revenue and resource growth for the company.Royal Gold now has 26 royalty streams, 8 development properties and 25 evaluation properties. Its pipeline is solid, including a royalty on the large Pensasquito mine of Goldcorp which, when it ramps up production in 2012, should add approximately 25% toRoyal’s revenues.Mining companies benefit from the royalty model by getting to raise capital without sellingequity, and that capital can be used immediately to explore or develop a mining property,while Royal Gold avoids operating expense, capital expenditure requirements, capital callsor environmental liabilities. Royalties can continue for the life of the mine, which for someof Royal Gold’s most significant sources of royalty revenue are 25 years or longer. As aresult, what Royal Gold receives is strong cash flow and high profit margins, particularlywhen the price of gold is climbing.Royal Gold’s revenues from its existing mines currently account for approximately $70million per annum. However, as the new mines enter the production phase from thedevelopment and construction phase, Royal Gold expects to receive additional revenues of approximately $60 million per year over the next 1.5 years. There will be some depletionat the existing mines, though, so the total revenues going forward should be slightly lessthan the sum of these numbers.The credit crisis has actually helped Royal Gold to strike some very favorable deals in the past year. Until recently, more diversified base metal companies generally did not needoutside capital, as metal prices were high and their cash flow was strong. The credit crisismeant that these companies were generally cut off from the capital markets and the plungein some metal prices, such as copper, significantly reduced their cash flow, and some of themost leveraged mining companies got into trouble. Consequently, Royal Gold has beenable to purchase significant gold royalties in the past year at favorable prices (highdiscount rates), such as a royalty package from Barrick Gold and, more recently, a royaltyinterest in the Andacollo mine from Teck Resources. The Barrick package includesapproximately 70 royalties. Even before these acquisitions, Royal Gold had a solid long-

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