Letter to Shareholders
Dear Shareholder,
Royal Gold delivered significant growth in fiscal 2010, both financially and via substantial additions to our royalty assets. We are now well positioned with a gold focused, diversified, long-life portfolio that provides our shareholders the benefits of gold price appreciation, potential production expansions and reserve increases through exploration. Due to our royalty business model, these benefits come without the operational risks and costs associated with an operating mining facility.
We now have 34 properties providing royalty revenue which has fueled growth in our financial results. Revenue increased by 85% to $137 million and free cash flow increased 62% to $100 million, on a year-over-year basis. More importantly, revenue and free cash flow on a per share basis have increased in each of the past nine years, and in fiscal 2010 totaled $3.13 per share and $2.29 per share, respectively. Although this growth has varied from year to year, our average compounded annual growth rate (“CAGR”) in revenue per share since 2001 has been 28%, while the CAGR in free cash flow per share has totaled 35%. The CAGR in earnings per share over the same period was 26%, with some variability as fiscal 2009 was impacted by one-time gains and fiscal 2010 was impacted by severance and acquisition costs associated with the acquisition of International Royalty Corporation (“IRC”).
Royal Gold’s decade of growth has been accomplished through excellent production performance by our producing partners, the increasing gold price, and large additions to our royalty portfolio through accretive acquisitions. During this time, we have been very active in acquiring new royalty interests and have increased the number of properties where we own royalty interests from 5 to 187. In fiscal 2010 alone, this figure increased 60%.
We are now beginning a transition into several significant revenue sources that are expected to build a new foundation for our Company.
- In 2007, we acquired a royalty interest in Goldcorp’s Peñasquito mine in Mexico, and we are now starting to receive revenue from that investment. The first sulfide line is operating at design capacity and construction was completed on the second sulfide line during the fiscal year. Production is expected to increase each quarter and Goldcorp is anticipating full production of 130,000 tonnes of ore per day in early calendar 2011.
- In January 2010, we completed an acquisition with a subsidiary of Teck Resources involving the Andacollo copper mine in Chile where we purchased the right to receive 75% of the gold production until 910,000 payable gold ounces have been sold, and then 50% of the gold produced thereafter. We are now starting to obtain revenue from this mine as well, with Teck expecting to be in full production in the fourth quarter of calendar 2010.
- In February 2010, we acquired IRC which consisted of 80 royalties highlighted by significant royalty interests on world-class assets like Barrick Gold’s Pascua-Lama project in Chile and Vale’s Voisey’s Bay mine in Canada. IRC assets have been included in our financials since February 22, 2010 and contributed $9 million in revenue for the partial year period.
- In March and July 2010, we increased our royalty interest at the Pascua-Lama project. When the July transaction closes, we will own a cumulative 5.23% royalty interest (at gold prices at or above $800 per ounce) on this property which is considered to be one of the largest undeveloped gold reserves in the world. Barrick estimates Pascua-Lama will produce about 775,000 ounces of gold annually during the first five years of operation and about 650,000 ounces annually over its 25-year mine life. A decision to construct this mine was made in May 2009 at an estimated cost of approximately $3.0 billion and Barrick expects to commence production in early 2013.
- Also in July 2010, we announced an agreement to acquire 25% of the payable gold produced from the Mt. Milligan copper-gold project in British Columbia in conjunction with the acquisition of Terrane Metals by Thompson Creek Metals. The closing of our transaction with Thompson Creek is subject to completion of their acquisition of Terrane. This mine is in the early stages of construction with full production anticipated in 2013. Terrane expects the reserves to support a mine life of at least 22 years and estimates that Mt. Milligan will produce approximately 262,000 ounces of gold annually during the first six years of operation and 195,000 ounces of gold annually over the entire mine life.
This year of expansion was exceptional and transformational, as we increased the assets of the Company by slightly over $1 billion. We expect Peñasquito, Andacollo, Pascua-Lama, Voisey’s Bay and Mt. Milligan, if the transaction is completed, to become the cornerstone assets of the Company for the next two decades, providing internally generated cash to fuel growth and pay dividends.
In addition to significant increases in our financial results and asset base, we also realized substantial growth in precious metal reserves subject to our royalties. During fiscal 2010, our precious metal equity ounces, as measured by the reserves declared by the mine operators multiplied by our applicable royalty rate, grew about 130%. Adding Mt. Milligan would result in a growth of slightly over 200% since fiscal 2009 reserves were reported.
To support our significant growth, we completed a sale of 5.98 million shares and obtained $255 million in credit facilities. Debt is appropriate for Royal Gold at this time to minimize share dilution and take advantage of low interest rates, particularly on an after tax basis. We ended the fiscal year with cash and receivables totaling $365 million and outstanding debt of $249 million, resulting in a capital structure that we believe continues to be conservative in relation to our expanding free cash flow and allows Royal Gold to further expand its business.
We recognize that our shareholders have many precious metal investment alternatives, including purchases of physical gold or precious metal exchange traded funds. To compete, Royal Gold seeks to provide value greater than gold price appreciation. The current gold bull market dates back to the low gold prices of 2001. Since that time, gold has increased 4.6 fold while our revenue and free cash flow have increased by multiples of 22.8 and 37.1, respectively. And in fiscal 2010, gold increased 25% compared to our revenue growth of 85% and free cash flow growth of 62%. This indicates the leverage in Royal Gold over simple gold price appreciation.
We continue to believe that macroeconomic and world events are supportive of a strong gold price environment. A sluggish economic recovery and high unemployment in the United States and much of Europe persists, enticing prolonged weak and expansive monetary policies. This, coupled with sovereign debt concerns, keeps gold on the forefront of safe haven investors. We also believe that the significant increase in money supply that we have experienced over the last few years will eventually lead to inflation, attracting wealth preservation investors. This economic uncertainty comes at a time when gold demand from Central Banks is increasing and international gold production is generally decreasing, after having peaked in 2001.
In summary, Royal Gold is well positioned and we are very pleased to see the revenue begin to materialize from previous investments, resulting in record financial performance. The addition of the IRC portfolio, the completion of the Andacollo transaction and the acquisition of new royalty interests at Pascua-Lama further strengthen our high quality precious metals portfolio. Looking ahead, fiscal 2011 is also shaping up to be an exciting year for Royal Gold with our July announcement of the Mt. Milligan agreement and our expectation of full commercial production from the Peñasquito, Andacollo, Wolverine, Las Cruces and Dolores mines, as well as initial production from the Canadian Malartic mine.
The level of activity at Royal Gold has been vigorous and I want to take this opportunity to formally recognize the effort and dedication of our 20 employees; many thanks to each of them for making fiscal 2010 such a successful year. I also want to express my sincere appreciation for the on-going support and trust of our shareholders in this management team and our business objectives.
Sincerely,
Tony A. Jensen
President and Chief Executive Officer