Dear Shareholders,

Fiscal 2013 was the first year in more than a decade that the gold price declined. Specifically, gold ended the year 25% lower largely due to a renewed faith in the United States economy and dollar. This has spawned an avalanche of modified business plans throughout the sector to cope with the new realities of a “lower gold price” environment and to refocus on margins, cost control, returns to shareholders and disciplined capital allocation.

Royal Gold never lost that focus. Our royalty business model allows us to keep a tight control on costs and our EBITDA* margins are consistently around 90%. Our compounded annual growth rate over the past decade in revenue per share, EBITDA per share, and normalized earnings per share was 19%, 22%, and 11%, respectively. With regard to disciplined capital allocation, the carrying cost of our assets is only $340 per gold equivalent ounce attributable to the Company, representing a nearly 4x margin compared to the current price of gold.

We recognize that financial stress for others can bring opportunities to Royal Gold. As such, in the second half of fiscal 2012 and the first half of fiscal 2013, we methodically enhanced our liquidity prior to the gold price downturn and are in excellent financial condition. In October 2012, we completed an equity offering on attractive terms to position the company for new acquisitions. We perceived that the industry would become capital constrained, with debt and equity financing limited or unavailable for many, and believed that having a strong balance sheet would result in opportunities. We ended the fiscal year with over $700 million in working capital and an undrawn credit facility of $350 million.

Fiscal 2013 has been a deal rich environment and we expect next year to be so as well. However we have been very careful with our shareholders’ money and have not chased acquisitions that don’t provide a reasonable return in the current gold price environment. We look forward to unique business opportunities in the coming year and will continue to be very selective as we consider new investments.

During the year, we increased our interest at Mt. Milligan by 12.25% of the payable gold in exchange for an upfront payment of $200 million and payments of $435 per ounce of gold delivered. We now have the right to purchase up to 52.25% of the payable gold from the property. We have been watching the construction progress with keen interest and are very excited to see that production is close at hand. It has been slightly over three years since we first invested in Mt. Milligan and the flow of funds is now ready to turn in our favor. We anticipate that Mt. Milligan will be our largest future source of revenue, potentially representing a 50% increase in net gold equivalent ounces at current gold prices and full production. This growth is already largely paid for, as we only have $12.9 million remaining of our $781.5 million investment commitment. Thompson Creek Metals, the owner of Mt. Milligan, expects to start plant commissioning in August 2013 and anticipates reaching commercial production by calendar 2013 year end. Based on that schedule, we should see meaningful revenue contributions commencing at or near the beginning of calendar 2014.

Our royalty business model allows us to keep a tight control on costs and our EBITDA margins are consistently around 90%. Our compounded annual growth rate over the past decade in revenue per share, EBITDA per share, and normalized earnings per share was 19%, 22%, and 11%, respectively.

Our other major development asset is Barrick Gold’s Pascua-Lama project on the border of Chile and Argentina. Although construction of the process facilities notably advanced in Argentina, the development schedule for the project suffered a setback during the fiscal year. Construction activities on the Chilean side of the project are currently suspended while environmental and other regulatory requirements are being addressed. Barrick has reinforced its commitment to the project, rescheduled construction to coincide with this environmental and regulatory work, and now expects production to commence in mid-2016. This delay impacts our near term project value, but we continue to focus on the characteristics that attracted us to the project in the first place. This is a world class asset with total gold reserves of about 18.0 million ounces with an expected average annual production profile of approximately 800,000 ounces per year at an all-in sustaining cash cost estimated to be in the lowest quartile in the industry. We continue to look for opportunities to invest in similar world class assets.

Mt. Milligan and Pascua-Lama represent two of our five cornerstone assets. The Andacollo mine in Chile operated by Teck, the Voisey’s Bay mine in Canada operated by Vale, and the Peñasquito mine in Mexico operated by Goldcorp represent our other three cornerstone assets. We expect all of these properties to have mine lives over two decades, which will provide a stable foundation for Royal Gold for many years to come. These assets are supplemented by more than 30 additional properties that are presently providing revenue to Royal Gold. This level of asset diversification is a strength of the Company and provides for more consistent financial results.

Andacollo reached steady state production during the fiscal year, following the post construction ramp-up period, and is now operating near the design capacity. Andacollo increased gold production by 33% during the year and was our largest revenue source, representing 28% of our total revenue.

Vale reached an agreement with the Newfoundland and Labrador provincial government to amend their Voisey’s Bay Development Agreement which provides the operation with additional mineral processing flexibility and they also committed to pursue underground mining to extend the mine life. Voisey’s Bay contributed 11% of Royal Gold’s total revenue.

Peñasquito suffered production limitations during the fiscal year due to water restrictions. Current guidance from Goldcorp for calendar 2013 forecasts production at about 80% of installed capacity, indicating the magnitude of growth possible once sufficient water is available to operate at full capacity. Goldcorp has identified additional resources and expects to have sufficient water available for the plant in the second half of calendar 2014. Peñasquito represented 10% of our total revenue during the fiscal year.

On an aggregate basis, increased metal production offset lower average gold prices, resulting in 10% higher revenue. Similarly, cash flow from operations was 6% higher for the fiscal year. However, earnings were 25% lower due mainly to a non-cash impairment on the value of third-party securities we own. Other contributing factors to lower earnings were interest expense associated with our 2019 Notes and higher depletion expense due to higher production volumes.

Although these are robust financial results given the current market conditions, broader market concerns and the Pascua-Lama challenges have weighed on our share price. In addition, valuation metrics for gold equities, including Royal Gold, have been compressed to a level unseen in decades. This has been driven by an investment rotation out of gold equities and into the broader market for a variety of reasons. Investors have a regained confidence in the United States economy and some are rotating out of gold, resulting in a 25% reduction in gold price during the fiscal year, most of that coming in the fourth fiscal quarter. At the same time, Royal Gold share price has declined disproportionately by 46%. This share price decline, coupled with our 33% dividend increase during the year, resulted in a dividend yield of nearly 2% at fiscal year end.

I believe the fundamentals of Royal Gold and its growth profile compare favorably to any business – inside or outside the gold industry. We have growth already bought and paid for at Mt. Milligan in the short term and Pascua-Lama in the long term, a strong financial position, a free option on gold price upside, an attractive dividend, a balanced portfolio, and a great team of dedicated professionals. I am highly encouraged about the future of Royal Gold and am delighted that we are positioned with strength during this period of opportunity.

I remain honored to be associated with a motivated and extremely capable team. At the end of the fiscal year, we bid farewell to Karen Gross, Vice President and Corporate Secretary. Karen dedicated 26 years to the company and we wish her the very best in her retirement. We are excited to welcome two new members to our team. Karli Anderson has quickly and capably taken on investor relation responsibilities and now serves as our Vice President of Investor Relations. Jason Hynes also recently joined Royal Gold and we look forward to his management of our foreign subsidiary in Switzerland, and his strong contribution in business development activities as our Director, Business Development and Global Sales.

We also strengthened our board by adding Ron Vance as a director of the Company during the fiscal year. Ron’s 30 years of experience in the mining industry as a senior executive in the areas of corporate development, marketing, project development, and finance – while working with some of the world’s largest mining companies – will be of great benefit to Royal Gold.

In closing, let me express my appreciation to all of our shareholders for your support of our efforts. It is a privilege to represent Royal Gold and on behalf of all of our employees, we thank you for that opportunity.

Sincerely,

Tony A. Jensen

 

* Adjusted EBITDA is a non-GAAP measure. Click here for more information.