FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 0-5664
ROYAL GOLD, INC.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-0835164
------------------------------- ----------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
SUITE 1000
1660 WYNKOOP STREET
DENVER, COLORADO 80202-1132
---------------------------------------- ------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(303) 573-1660
----------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Not Applicable
----------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS OF COMMON STOCK FEBRUARY 4, 1999
----------------------- ------------------
$.01 PAR VALUE 16,933,876 SHARES
ROYAL GOLD, INC.
INDEX PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets ................... 3-4
Consolidated Statements of Operations.......... 5-6
Consolidated Statements of Cash Flows ......... 7-8
Notes to Consolidated Financial
Statements .................................... 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................... 16
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ............. 23
SIGNATURES ........................................... 24
Cautionary "Safe Harbor" Statement Under the Private Securities
Litigation Reform Act of 1995.
With the exception of historical matters, the matters discussed in this
report are forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from
projections or estimates contained herein. Such forward-looking
statements include statements regarding planned levels of exploration
and other expenditures, anticipated mine lives, timing of production,
schedules for development and estimates of reserves and mineralization.
Factors that could cause actual results to differ materially include,
among others, decisions and activities of Cortez regarding the Pipeline
and South Pipeline deposits, unanticipated grade, geological,
metallurgical, processing or other problems, conclusions of feasibility
studies, changes in project parameters as plans continue to be refined,
the timing of receipt of governmental permits, the failure of plant,
equipment or processes to operate in accordance with specifications or
expectations, results of current exploration activities, accidents,
delays in start-up dates, environmental costs and risks, changes in
gold prices, as well as other factors. Most of these factors are
beyond the Company's ability to predict or control. The Company
disclaims any obligation to update any forward-looking statement made
herein. Readers are cautioned not to put undue reliance on forward-
looking statements.
2
ROYAL GOLD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
-----------------------------------
December 31, June 30,
1998 1998
-----------------------------------
Current Assets
Cash and equivalents $ 6,449,270 $ 8,462,083
Marketable securities 4,012,125 3,007,505
Trade and other receivables 303,495 516,186
Royalties receivable in gold 97,457 83,194
Inventory 61,089 69,101
Prepaid expenses and other 57,125 70,065
---------- ----------
Total current assets 10,980,561 12,208,134
---------- ----------
Property and equipment, at cost
Mineral properties 7,174,959 6,949,655
Furniture, equipment
and improvements 686,050 681,073
---------- ----------
7,861,009 7,630,728
---------- ----------
Less accumulated depreciation,
depletion and amortization (1,279,679) (981,625)
---------- ----------
Net property and equipment 6,581,330 6,649,103
---------- ----------
Other assets
Noncurrent marketable
securities 1,012,812 2,012,500
Other 57,767 57,567
---------- ----------
Total other assets 1,070,579 2,070,067
---------- ----------
$ 18,632,470 $ 20,927,304
========== ==========
The accompanying notes are an integral part of
these consolidated financial statements.
3
ROYAL GOLD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
----------------------------------
December 31, June 30,
1998 1998
-----------------------------------
Current Liabilities
Accounts payable $ 506,935 $ 548,904
Taxes payable 0 45,280
Post retirement benefits 26,400 26,400
Accrued compensation 281,384 140,000
Other 14,406 10,190
---------- ----------
Total current liabilities 829,125 770,774
---------- ----------
Post retirement benefit
liabilities 94,297 107,497
Commitments and contingencies
(Notes 1 and 6)
Stockholders' equity
Common stock, $.01 par value,
authorized 40,000,000 shares;
issued 17,158,602 and 17,069,602
shares, respectively 171,586 170,696
Additional paid-in capital 54,008,437 53,978,827
Accumulated deficit (35,437,605) (33,340,707)
---------- ----------
18,742,418 20,808,816
Less treasury stock, at cost
(204,726 and 143,726 shares,
respectively) (1,033,370) (759,783)
---------- ----------
Total stockholders' equity 17,709,048 20,049,033
---------- ----------
$ 18,632,470 $ 20,927,304
========== ==========
The accompanying notes are an integral part of
these consolidated financial statements.
4
ROYAL GOLD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended
December 31,
------------------------------------
1998 1997
------------------------------------
Royalty income $ 251,846 $ 75,349
Loss on gold inventory (580) (909,639)
Consulting revenues 6,575 8,951
Costs and expenses
Costs of operations 80,494 68,992
Direct costs of
consulting revenues 1,625 899
General and administrative 444,624 413,729
Exploration 643,083 576,896
Lease maintenance
and holding costs 15,358 63,589
Depreciation, depletion
and amortization 132,414 15,420
---------- ----------
Total costs and expenses 1,317,598 1,139,525
---------- ----------
Operating loss (1,059,757) (1,964,864)
Interest and other income 248,099 230,059
Loss on marketable
securities (17,411) (3,197)
---------- ----------
Net loss $ (829,069) $ (1,738,002)
========== ==========
Basic and diluted
loss per share $ (0.05) $ (0.10)
========== ==========
Basic and diluted weighted
average shares outstanding 16,969,072 16,689,616
========== ==========
The accompanying notes are an integral part of
these consolidated financial statements.
5
ROYAL GOLD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the six months ended
December 31,
------------------------------------
1998 1997
------------------------------------
Royalty income $ 634,951 $ 1,878,864
Loss on gold inventory (580) (948,621)
Consulting revenues 9,575 22,351
Costs and expenses
Costs of operations 141,235 211,968
Direct costs of
consulting revenues 1,625 5,135
General and administrative 816,621 778,985
Exploration 1,545,550 1,106,825
Lease maintenance
and holding costs 327,333 358,475
Depreciation and amortization 298,054 28,695
---------- ----------
Total costs and expenses 3,130,418 2,490,083
---------- ----------
Operating loss (2,486,472) (1,537,489)
Interest and other income 406,985 338,627
Loss on marketable
securities (17,411) (35,083)
Net loss $ (2,096,898) $ (1,233,945)
========== ==========
Basic and diluted
loss per share $ (0.12) $ (0.08)
========== ==========
Basic and diluted weighted
average shares outstanding 16,946,341 16,342,469
========== ==========
The accompanying notes are an integral part of
these consolidated financial statements.
6
ROYAL GOLD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months ended
December 31,
------------------------------------
1998 1997
------------------------------------
Cash flows from
operating activities
Net loss $ (2,096,898) $ (1,233,945)
---------- ----------
Adjustments to reconcile net loss
to net cash used
in operating activities:
Depreciation, depletion
and amortization 298,054 28,695
Loss on marketable securities 17,411 35,083
Loss on gold inventory 580 948,621
(Increase) decrease in:
Marketable securities, trading 0 (55,029)
Trade and other receivables 212,691 (134,993)
Royalties receivable in gold (14,263) 2,542,975
Inventory 7,432 (4,804,111)
Prepaid expenses and other 12,940 508,117
Increase (decrease) in:
Accounts payable
and accrued liabilities 58,351 (79,279)
Post retirement liabilities (13,200) (13,199)
---------- ----------
Total Adjustments 579,996 (1,023,120)
---------- ----------
Net cash used in operating
Activities $ (1,516,902) $ (2,257,065)
---------- ----------
The accompanying notes are an integral part of
these consolidated financial statements.
7
ROYAL GOLD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
For the six months ended
December 31,
------------------------------------
1998 1997
------------------------------------
Cash flows from
investing activities
Purchase/sale
of marketable securities $ (22,343) $ 0
Capital expenditures for
property and equipment (230,281) (348,902)
Increase in other assets (200) (34,800)
---------- ----------
Net cash used in investing
activities (252,824) (383,702)
---------- ----------
Cash flows from financing activities
Proceeds from issuance
of common stock 30,500 6,527,876
Purchases of common stock (273,587) (570,460)
---------- ----------
Net cash provided by (used in)
financing activities (243,087) 5,957,416
---------- ----------
Net increase (decrease)
in cash and equivalents (2,012,813) 3,316,649
---------- ----------
Cash and equivalents at
beginning of period 8,462,083 3,333,298
---------- ----------
Cash and equivalents
at end of period $ 6,449,270 $ 6,649,947
========== ==========
The accompanying notes are an integral part of
these consolidated financial statements
8
ROYAL GOLD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
--------------------------------------------
For a more complete understanding of the business and operations of
Royal Gold, Inc., please refer to the Report on Form 10-K of Royal
Gold, Inc. for the annual period ended June 30, 1998.
The information in this report reflects all adjustments that, in the
opinion of management, are necessary to express a fair statement of
results for the periods presented. All such adjustments are of a
normal recurring nature. The results of operations for the period ended
December 31, 1998, are not necessarily indicative of the results to be
expected for the full fiscal year.
1. PROPERTY AND EQUIPMENT
Property and equipment consists of the following components at December
31, 1998, and June 30, 1998:
December 31, June 30,
1998 1998
------------- -------------
Mineral Properties:
South Pipeline-
Net Profits Interest $ --- $ ---
Bald Mountain Royalty, net 2,098,719 2,369,353
Inyo Gold
(f/k/a Long Valley), net 4,311,537 4,086,233
Camp Bird 120,110 120,110
---------- ----------
6,530,366 6,575,696
Office furniture, equipment
and improvements, net 50,964 73,407
---------- ----------
Net property and equipment $ 6,581,330 $ 6,649,103
========== ==========
As discussed in the following paragraphs, activity is being conducted
on substantially all of the Company's mineral properties. The
recoverability of the carrying value of capitalized projects is
evaluated based upon undiscounted estimated future net cash flows from
each property's proven and probable reserves. Reductions in the
carrying value of each property are recorded to the extent that the
Company's carrying value in each property exceeds its estimated future
undiscounted cash flows.
Presented below is a discussion of the status of each of the Company's
significant mineral properties.
9
ROYAL GOLD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
--------------------------------------------
A. SOUTH PIPELINE (CRESCENT VALLEY)
The South Pipeline property is a claim block containing sediment-hosted
gold deposits located in Lander County, Nevada. Pursuant to an
agreement dated September 18, 1992, the Company holds a 20% net profits
interest in this project. Cortez Gold Mines ("Cortez") is the project
operator. Heap leach production is continuing on stockpiled material
from the Crescent Pit portion of the project, from which Cortez began
mining operations in 1994. The remainder of the South Pipeline project
contains the principal reserves and is currently being permitted.
Cortez is also exploring for additional mineralization on project ground.
The Company anticipates that production from stockpiled and on-pad heap
leach material from the Crescent Pit will continue in fiscal 1999.
B. INYO GOLD PROJECT (formerly LONG VALLEY)
On January 13, 1999, Royal Gold announced that it had renamed the Long
Valley gold project as the Inyo Gold Project.
The Inyo Gold Project, in Mono County, California, is subject to an
agreement between the Company and Standard Industrial Minerals, Inc.
Pursuant to the agreement, the Company was entitled, through December
31, 1997, to acquire Standard Industrial Minerals' interest in the
property, upon payment of $1,000,000. This agreement was extended
through December 31, 2003, as described below.
In November 1997, the Company announced an increase in the reserve
estimate for Inyo Gold Project. Based on Royal Gold's drilling results
through August 1997, the Inyo Gold Project contains proven and probable
reserves, at a gold price of $350 per ounce, of approximately 39.1
million tons, averaging 0.018 opt (at a cut-off grade of 0.008 opt).
The reserves are contained within a mineralized deposit that includes
approximately 47.0 million tons of oxidized material, averaging 0.018
ounces of gold per ton ("opt") (using a cut-off of 0.01 opt).
In December 1997, Royal Gold announced that it had secured, for
$100,000, a one-year extension of its option to acquire all of the
interest of Standard Industrial Minerals, Inc. in the Inyo Gold
Project. Under the terms of the extension of the option, Mono County
Mining Company ("MCMC") (formerly Royal Long Valley) was required to
pay $900,000 to Standard Industrial Minerals, on or before December 31,
1998, or else it would forfeit the right to acquire all of Standard
Industrial's interest in the Inyo Gold Project.
In November 1998, Royal Gold announced that it had secured a further
five-year extension of its option to acquire all of the interest of
10
ROYAL GOLD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
--------------------------------------------
Standard Industrial Minerals in the Inyo Gold Project. Under the terms
of the extension agreement, MCMC may acquire all of Standard
Industrial's interest in the property, at any time prior to December
31, 2003, upon payment of $900,000, plus accrued interest at 6% per
year. MCMC must pay Standard Industrial a minimum of $100,000 per year,
over the five-year extension period, which is then credited against the
option purchase amount.
C. BALD MOUNTAIN
On March 13, 1998, Royal Gold acquired, from private parties, a 50%
undivided interest in a sliding-scale net smelter return royalty that
burdens approximately 81% of the current reserves at the Bald Mountain
Mine, White Pine County, Nevada. Bald Mountain is owned and operated
by Placer Dome U.S. Inc.
The Company anticipates that the royalty interest will pay, on a 100%
basis, at the level of a 3.5% net smelter returns for the balance of
the mine life at Bald Mountain. Accordingly, the Company anticipates
that its receipts from royalty-burdened production at Bald Mountain
will be at the level of 1.75% net smelter returns.
2. INCOME TAXES
At June 30, 1998, the Company had an estimated net operating loss
carryforward for federal income tax purposes of approximately $25.6
million. If not used, the net operating loss carryforwards will expire
during the years 2001 through 2011. The Company is not recognizing any
benefit from its current losses, due to some uncertainty as to their
ultimate realization.
3. ROYALTIES RECEIVABLE IN GOLD
At December 31, 1998, 348 ounces of gold related to the December 31,
1998, quarterly production from the Crescent Pit is recorded as a
receivable. This gold was received on February 1, 1999. Royal Gold has
exposure for any changes in the gold price on this receivable between
the end of the quarter and the time of receipt.
4. INVENTORY
Gold inventory on the balance sheet consists of refined gold bullion
held in uninsured accounts. This gold is stored by the Company's
refiner in Utah. The inventory is carried at market value at the end
of the period with unrealized gains or losses included in the results
of operations for the period. At December 31, 1998, the Company held
124 ounces of gold bullion in inventory.
11
ROYAL GOLD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
--------------------------------------------
5. EARNINGS PER SHARE COMPUTATION
Options to purchase 555,020 shares of common stock, at an average price
of $0.13 per share, were not included in the computation of diluted EPS
because the Company experienced a net loss in both the quarter and six
month periods and these options are anti-dilutive. Options to purchase
850,498 shares of common stock, at an average price of $6.06 per share,
were outstanding at December 31, 1998, but were not included in the
computation of diluted EPS because the options' exercise price was
greater than the average market price of the common shares.
Options to purchase 204,000 shares of common stock, at an average price
of $14.13 per share, were not included in the computation of diluted
EPS because the Company experienced a net loss in both the quarter and
six month periods and these options are anti-dilutive. Options to
purchase 850,498 shares of common stock, at an average price of $6.06
per share, were outstanding at December 31, 1997, but were not included
in the computation of diluted EPS because the options' exercise price
was greater than the average market price of the common shares.
6. CONTINGENCIES AND COMMITMENTS
The operations and activities conducted on the properties in which the
Company holds various interests are subject to various federal, state,
and local laws and regulations concerning protection of the
environment. These laws are continually changing and are generally
becoming more restrictive. Management believes that the Company is in
material compliance with all applicable laws and regulations.
7. GENERAL
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Therefore, it is
suggested that these financial statements be read in connection with
the financial statements and the notes included in the Company's
audited consolidated financial statements as of June 30, 1998.
12
ROYAL GOLD, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
----------------------------------------------------
Royal Gold is engaged in the acquisition and management of gold royalty
interests and in the exploration, development, and sale of gold
properties.
The Company's primary business strategy is to create and acquire
royalties and other carried ownership interests in gold mining
properties through exploration and development activity (and subsequent
transfer of the operating interest in the subject properties to other
firms), and through the direct acquisition of such interests.
Substantially all of the Company's revenues are and can be expected to
be derived from royalty interests, rather than from mining operations
conducted by the Company.
The Company has continued to explore its properties and anticipates
continued exploration activities for the remainder of the year. The
Company's long-term viability is ultimately dependent upon the
acquisition of gold royalties and the successful exploration and
subsequent development and operation by others of the Company's mineral
interests. It can be anticipated, because of the nature of the
business, that exploration on many of these properties will prove
unsuccessful and that the Company will terminate its interest in such
properties. As significant results are generated at any such property,
the Company will re-evaluate the property and may substantially
increase or decrease the level of expenditures on that particular
property. The profitability and reserves of the Company are affected
by the prevailing gold price.
YEAR 2000 IMPACT
The Year 2000 issue relates to equipment that contains hardware and/or
software programmed to read the year based on its last two digits.
This equipment will not be able to differentiate between years at the
turn of the Century and, if this problem is left uncorrected, may
result in malfunctions of the equipment.
Throughout the Company, the use of computers is limited to Windows
operating systems on computers linked to Local Area Networks. Software
consists of standardized packages from major developers. The Year 2000
issue also relates to other office equipment, such as telephones, voice
mail and the office security system. The Company is in the process of
contacting all relevant vendors and manufacturers to determine whether
any updates or replacements will be required. The cost of this
project, to date, has not been material and the Company does not expect
future costs of the project to be material. An entire system
replacement of all computers and software would total approximately
$75,000. Many components have been certified as Year 2000 compliant.
Those companies that provide banking, insurance and other administrative
services to the Company are also being contacted for Year 2000 compliance.
13
ROYAL GOLD, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
----------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had a working capital surplus of
$10,151,436. Current assets were $10,980,561, compared to current
liabilities of $829,125, for a current ratio of 13 to 1. This compares
to current assets of $12,208,134, and current liabilities of $770,774,
at June 30, 1998, resulting in a current ratio of 16 to 1.
The Company's liquidity needs are generally being met from its
available cash resources, royalty income, interest income, and the
issuance of common stock. During the first six months of fiscal 1998,
the Company earned $292,137 from heap leach production at the Crescent
Pit, and $351,814 on its royalty interest at Bald Mountain. The
Company also earned $406,985 in interest income on its cash and
marketable securities portfolio and from gold leasing during the six
month period. This marketable securities portfolio is invested in U.S.
treasury notes with maturities of up to fifteen months, has an adjusted
cost basis of $5,024,936, and had a market value, at December 31, 1998,
of $5,046,255.
During the first six months of fiscal 1999, the Company repurchased
61,000 of its common shares at a cost of $273,587. This repurchase was
made in accordance with the Company's stock repurchase program
announced on May 2, 1997, in which the Board of Directors authorized
the repurchase of up to $5 million of the Company's common stock, from
time-to-time, in the open market or in privately negotiated
transactions. To date, the Company has repurchased $958,197 of its
common stock.
Management believes its cash resources will be adequate to fund planned
operations for the foreseeable future. The Company anticipates
receiving $350,000 to $450,000 per year in revenues from its interest
at Bald Mountain, assuming a constant gold price of $300 per ounce.
This will contribute approximately $75,000 to earnings annually over
the estimated mine life. Revenues from the Company's interest in the
Crescent Pit will decrease versus production levels obtained in fiscal
1998. More extensive production from the South Pipeline deposit is
expected to commence shortly after environmental permitting is
completed, which is expected in 1999. Cortez is currently
reviewing life of mine scenarios and, during the December 31,
1998 quarter, embarked on a new exploration program at South
Pipeline that is budgeted at $3.3 million.
The Company anticipates total general and an administrative expense for
fiscal 1999 to be approximately $2,000,000, of which $816,621 has been
spent to date. The Company also anticipates expenditures for
exploration and property holding costs to be approximately $2,400,000,
of which $1,872,883 has been spent. Development expenditures at the Inyo Gold
14
ROYAL GOLD, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
----------------------------------------------------
Project are estimated at $400,000, of which $225,304 has been spent.
Because of the seasonal nature of the Company's activities,
development, exploration and holding costs are disproportionately
incurred throughout the year. On a prospective basis these amounts
could increase or decrease significantly, based on exploration results
and decisions about releasing or acquiring additional properties, among
other factors.
RESERVES
On January 26, 1999, Placer Dome U.S. Inc. ("PDUS"), the 60% owner and
operator of Cortez Gold Mines, notified the Company that it has updated
the reserves and mineralization at South Pipeline. This new reserve
estimate represents a 46% increase in contained ounces compared with
the June 30, 1998 reserves. Set forth below is a chart showing the
reserves that have been defined at the South Pipeline property as of
December 31, 1998:
South Pipeline
Proven and Probable Reserves (1)
December 31, 1998
Average
Tons Grade Contained
(millions) (oz Au/ton) Oz Au (2)
South Pipeline Property
Crescent Pit:
Heap Leach Stockpile (3) 0.21 0.023 4,900
South Pipeline Deposit 122.13 0.037 4,580,000
- ----------------------------------
(1) "Reserve" is that part of a mineral deposit, which could be
economically and legally extracted or produced at the time of the
reserve determination.
"Proven (Measured) Reserves" are reserves for which (a) the quantity is
computed from dimensions revealed in outcrops, trenches, workings or
drill holes and the grade is computed from the results of detailed
sampling, and (b) the sites for inspection, sampling and measurement
are spaced so closely and the geologic character is so well defined
that the size, shape, depth and mineral content of the reserves are
well-established.
"Probable (Indicated) Reserves" are reserves for which the quantity and
grade are computed from information similar to that used for proven
(measured) reserves, but the sites for inspection, sampling, and
measurement are farther apart or are otherwise less adequately spaced.
The degree of assurance of probable (indicated) reserves, although
lower than that for proven (measured) reserves, is high enough to
15
ROYAL GOLD, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
----------------------------------------------------
assume geological continuity between points of observation.
(2) Contained ounces shown are before an allowance for dilution of ore
in the mining process and before losses in recovery. The assumed
recovery rates are 86% for South Pipeline mill-grade ore and 65% for
heap leach material.
(3) Amounts shown represent 100% of the reserves. The Company holds a
20% net profits interest in this property.
In August 1998, Placer Dome U.S. ("PDUS") advised Royal Gold that
Cortez now forecasts an acceleration of the development and production
of the South Pipeline deposit, because of the recent completion of its
1998 life of mine plan update, and because of its reassessment of how
the South Pipeline ore should be processed. Cortez now believes
approximately 80% of the South Pipeline ore will go to the heap leach
pads, and approximately 20% of the ore will be processed in the
Pipeline mill. Cortez? current mine plan anticipates that all required
permits for the full-scale mining and processing of South Pipeline ore
may be issued by mid-year 1999, and that pre-stripping operations will
begin in 2001, with significant production from South Pipeline
commencing in 2002.
Although Royal Gold holds a passive interest in the South Pipeline
project, it has, under its agreement with Cortez, certain rights to
ensure that the development of the South Pipeline deposit is not
discriminated against, even in the event that the operator has other
more profitable opportunities in the area. The test for Cortez is what
a prudent operator would do with respect to South Pipeline, without
regard to other properties or facilities operated by Cortez in the
vicinity. In order to fulfill this prudent operator test, Cortez
executed a "stand-alone" study that considers development of South
Pipeline without regard to its Pipeline project. Royal Gold is
reviewing Cortez' stand-alone study in comparison with its own stand-
alone analysis. The Company continues to have discussions with Cortez
and PDUS regarding this issue and Cortez' mine plan for South Pipeline.
On January 26, 1999, PDUS, the owner and operator of Bald Mountain Gold
Mine, notified the Company that it has updated the reserves and
mineralization at Bald Mountain, as of December 31, 1998. Set forth
below is a chart showing the reserves that have been defined at that
portion of the Bald Mountain property where the Company has a royalty
interest:
16
ROYAL GOLD, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
----------------------------------------------------
Bald Mountain
Proven and Probable Reserves (1)
December 31, 1998
Average
Tons Grade Contained
(millions) (oz Au/ton) Oz Au (2)
Bald Mountain Top Area 10.8 0.075 811,000
- ----------------------------------
(1) "Reserve" is that part of a mineral deposit, which could be
economically and legally extracted or produced at the time of the
reserve determination.
"Proven (Measured) Reserves" are reserves for which (a) the quantity is
computed from dimensions revealed in outcrops, trenches, workings or
drill holes and the grade is computed from the results of detailed
sampling, and (b) the sites for inspection, sampling and measurement
are spaced so closely and the geologic character is so well defined
that the size, shape, depth and mineral content of the reserves are
well-established.
"Probable (Indicated) Reserves" are reserves for which the quantity and
grade are computed from information similar to that used for proven
(measured) reserves, but the sites for inspection, sampling, and
measurement are farther apart or are otherwise less adequately spaced.
The degree of assurance of probable (indicated) reserves, although
lower than that for proven (measured) reserves, is high enough to
assume geological continuity between points of observation.
(2) Contained ounces shown are before an allowance for dilution of ore
in the mining process.
(3) The Company owns a 1.75% NSR royalty on this portion of the Bald
Mountain Mine.
DEVELOPMENT
On November 6, 1998, Mono County Mining Company ("MCMC")(formerly Royal
Long Valley), a subsidiary of Royal Gold, Inc., secured a five-year
extension of its option to acquire all of the interest of Standard
Industrial Minerals, Inc. in the Inyo Gold Project (formerly Long
Valley), Mono County, California.
Under the terms of the extension agreement, MCMC may acquire all of
Standard Industrial's interest in the property, at any time prior to
December 31, 2003, upon payment of $900,000, plus accrued interest at
6% per year. MCMC must pay Standard Industrial a minimum of $100,000
per year, over the five-year extension period, which is then credited
against the option purchase amount.
17
ROYAL GOLD, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
----------------------------------------------------
MINERALIZATION
On December 22, 1998, the Company announced the results of continued
exploration at the South Pipeline Project by the Cortez Joint Venture
("Cortez") (Placer Dome U.S. Inc. (60%) and Kennecott Minerals Company
(40%)). Based on exploration and development drilling by Cortez through
1998, Royal Gold estimates that the deposit now includes 135.4 million
tons of mineralized material, with an average grade of 0.044 ounces of
gold per ton, containing approximately 5.96 million ounces of gold.
This manual estimate was calculated using a 0.01 cut-off grade, and
does not factor in any mining dilution or processing losses.
Additional work is required before it can be determined how much of
this material may be classified as reserves.
EXPLORATION
On January 5, 1999, the Company announced that substantial gold
mineralization has been discovered at the Milos Gold Project, on the
island of Milos, Greece. The project encompasses a gold exploration
license area covering Milos and three neighboring islands in the Aegean
Sea. As part of an on-going exploration program managed by Royal Gold,
more than 32,800 feet of reverse circulation drilling have now been
completed. Since the drilling program began in August 1998, sixty
reverse circulation drill holes have been completed, testing six target
areas within a 3.5 square mile area in the southwestern portion of the
island of Milos.
During the quarter ended December 31, 1998, the Company terminated its
exploration agreement with Union Pacific Resources Group Inc.
ROYALTY ACQUISITIONS
On February 10, 1999, the Company announced that it has agreed to
finance the underground development of International Skyline Gold
Corporation's Bronson Slope High claims. For its investment of
approximately $150,000, Royal Gold will receive the greater of 22% of
net operating profits or 2% of net smelter returns from High claim
production until payback, and the greater of 8.25% of net operating
profits or 1% of net smelter returns after payback. Royal Gold may
extend additional funds to Skyline, up to a total of approximately
$331,000, to finance additional development and reserve definition.
"Payback" is defined as 125% of Royal Gold's total investment in the
High claims, together with the costs to Royal Gold of diligence and
documentation of the financing transaction, with Payback estimated not
to exceed approximately $447,000.
Effective as of January 20, 1999, Royal Gold also acquired, for
$175,000 in cash, from a private individual, a 5% net smelter returns
18
ROYAL GOLD, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
----------------------------------------------------
royalty interest on a portion of the Mule Canyon mine, operated by
Newmont Gold Company, in Lander County, Nevada. The portion of the
mine subject to this royalty interest is projected to be in production
during 2001 and 2002, and is expected to produce some 24,000 ounces, at
current gold prices.
RESULTS OF OPERATIONS
FOR THE QUARTER ENDED DECEMBER 31, 1998, COMPARED TO THE QUARTER
ENDED DECEMBER 31, 1997
For the quarter ended December 31, 1998, the Company reported a net
loss of $829,069 or $0.05 per share, as compared to net loss of
$1,738,002, or $0.10 per share, for the quarter ended December 31, 1997.
Royalty income for the current quarter of $251,846, compared to $75,349
for the quarter ended December 31, 1997, relates to Royal Gold's
interests in the South Pipeline property and at Bald Mountain. The
increase in royalty income is primarily attributable to royalty income
of $154,388 from Bald Mountain. The Company anticipates modest
royalties from heap leach production from the Crescent Pit through 1999.
The decrease in the loss in gold inventory in the current quarter
versus the loss in the same quarter last year relates to a substantial
decrease in gold inventory at December 31, 1998, versus December 31,
1997. Last year's loss related to a substantial decline in the gold
price on 23,115 ounces of gold. At December 31, 1998, the
Company held 124 ounces of gold in inventory.
Costs of operations increased to $80,494 for the quarter ended December
31, 1998, compared to $68,992 for the quarter ended December 31, 1997,
primarily because of the increase associated with the levy of Nevada
Net Proceeds Tax on the revenues from Bald Mountain.
General and administrative costs of $444,624 for the current quarter
have increased from $413,729 for the quarter ended December 31, 1997,
primarily because of increased expenditures incurred related to
investor communications.
Exploration expenditures of $643,038 for the quarter ended December 31,
1998, increased from $576,896 for the quarter ended December 31, 1997,
primarily from exploration activity at Milos, offset by decreased
expenditures in properties in Nevada, Utah, Colorado and Wyoming.
19
ROYAL GOLD, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
----------------------------------------------------
Lease maintenance and holding costs decreased from $63,589 for the
quarter ended December 31, 1997, to $15,358 for the quarter ended
December 31, 1998, due to the cessation of advance minimum royalties on
a property in Nevada.
Depreciation, depletion, and amortization costs increased from $15,420
for the quarter ended December 31, 1997, to $132,414 for the quarter
ended December 31, 1998, primarily from the depletion expense related
to the Company's royalty interest at Bald Mountain.
Interest income increased from $230,059 for the quarter ended December
31, 1997, to $248,099 for the quarter ended December 31, 1998,
primarily due to increased return on cash investments.
FOR THE SIX MONTHS DECEMBER 31, 1998, COMPARED TO THE SIX MONTHS
ENDED DECEMBER 31, 1997
For the six months ended December 31, 1998, the Company reported a net
loss of $2,096,898, or $0.12 per share, as compared to a net loss of
$1,233,945, or $0.08 per share, for the six months ended December 31,
1997.
Year to date royalty income of $634,951 compared to $1,878,864 for the
prior year. The decrease primarily relates to Royal Gold's interest in
the South Pipeline property, from which the Company was receiving
royalty payments on the final production of mill-grade ore from the
Crescent Pit in fiscal 1998. During fiscal 1999, royalty income has
included $351,815 from the Company's royalty at Bald Mountain, and the
balance is from heap leach production of Crescent Pit ore.
The decrease in the loss in gold inventory in the current six month
period versus the loss in the same quarter last year relates to a
substantial decrease in gold inventory at December 31, 1998, versus
December 31, 1997. Last year's loss related to a substantial decline
in the gold price on 23,115 ounces of gold. At December 31, 1998, the
Company held 124 ounces of gold in inventory.
Costs of operations decreased to $141,235 for the six months ended
December 31, 1998, compared to $211,968 for the six months ended
December 31, 1997, primarily because of the lower Nevada Net Proceeds
Tax levied on the lower revenues from the Crescent Pit.
General and administrative costs of $816,621 for the six months ended
December 31, 1998 increased from $778,985 for the six months ended
December 31, 1997, primarily because of increased expenditures incurred
related to investor communications.
20
ROYAL GOLD, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
----------------------------------------------------
Exploration expenditures of $1,545,550 for the six months ended
December 31, 1998, increased from $1,106,825 for the six months ended
December 31, 1997, primarily due to a higher level of exploration
activity at three properties, including two properties in Nevada, and
exploration on the island of Milos, in Greece. This is offset by the
cessation of expenditures on properties that were under exploration by
the Company last year, but have now been dropped.
Lease maintenance and holding costs decreased from $358,475 for the six
months ended December 31, 1997, to $327,333 for the six months ended
December 31, 1998, due to decreased advance minimum royalties paid on a
property in Nevada.
Depreciation, depletion, and amortization costs increased from $28,695
for the six month period ended December 31, 1997, to $298,054 for the
six month period ended December 31, 1998, primarily from the depletion
expense related to the Company's royalty interest at Bald Mountain.
Interest and other income increased from $338,627 for the six months
ended December 31, 1997, to $406,985 for the six months ended December
31, 1998, primarily due to the increased return on cash investments.
For a more complete understanding of the business and operations of
Royal Gold, Inc., please refer to the Report on Form 10-K of Royal
Gold, Inc. for the annual period ended June 30, 1998.
20
PART II: OTHER INFORMATION
----------------------------
Item 6: Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
None
(b) Reports on Form 8-K
-------------------
None
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
ROYAL GOLD, INC
(Registrant)
Date: February 16, 1999 By: /s/ Stanley Dempsey
-------------------------
Stanley Dempsey
Chairman of the Board and
Chief Executive Officer
Date: February 16, 1999 By: /s/ Thomas A. Loucks
------------------------
Thomas A. Loucks
Treasurer
Chief Financial Officer
22
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<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1999
<PERIOD-END> DEC-31-1998 DEC-31-1998
<CASH> 6,449,270 6,449,270
<SECURITIES> 4,012,125 4,012,125
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