Royal Gold Has A Bright Future (RGLD)

By Jon Ogg | April 20, 2007 AAA

Royal Gold Inc. (Nasdaq:RGLD) is a Colorado-based gold company that is different than most. It has been a controversial name in the past because of limited investor knowledge, but recently, it may have changed its position among the second- and third-tier gold stocks.

Background
The company has been around since 1981, originally as an oil and gas exploration and production company. With the collapse of the oil markets in the 1980s it changed its focus to gold. The stock market crash of 1987 also made the company shift its focus from being a producer to that of a minority interest investor.

Current Portfolio
It claims to hold interests in three of the largest gold mines in North America and still only has 15 employees as of its latest report. This used to be even smaller with fewer than 10 employees just a few years ago.

If you look through its portfolio, you will see that the company is a co-royalty partner with some of the largest names in the sector: Placer Dome, Rio Tinto (NYSE:RTP), Barrick Gold (NYSE:ABX), Newmont Mining (NYSE:NEM), Coeur d'Alene Mines (NYSE:CDE) and others.

Most of these are located in Nevada, although it also owns royalty streams in Montana and Argentina. On the exploration side it owns royalty interests in Russia, Bulgaria, Nevada, and California. It recently closed on a $20.5 million transaction to buy into the Pascua Lama project on the border between Argentina and Chile.

Why Investors View It Differently
What made Royal Gold different than most gold companies is that it is not a miner of gold itself. The company is one of the few U.S.-based gold companies that is also a listed firm deemed a "royalty company".

These are more common in Canada and in Europe, but this may be the only exchange-listed company based in the United States. It owns and manages royalties on precious metals in a geographically diversified portfolio. This allows the company to collect payments from successful mining operations without the traditional capital expenditures and operating costs associated with being a traditional miner. The company does hedge and has sliding royalty scales, but it also tries to buy floors in these sliding scales.

What's the Impact of Its Recent Changes?
The company had a stock offering earlier this month. It sold 4 million shares at a price of $29.25 a share to raise a net of $110.9 million after commissions and expenses. The sale was earmarked for repayment of its revolving credit facility with HSBC Bank USA, to fund acquisitions, and the hallmark "general corporate purposes".

HSBC (NYSE:HBC) was the sole coordinator, but it also used Merrill Lynch (NYSE:MER), JP Morgan (NYSE:JPM), National Bank Financial, and UBS (NYSE:UBS) as co-managers. Without any recent major analyst coverage, it should now be expected that Royal Gold will get more coverage from Wall Street if you look at the underwriting group.

In its previous report (December 31, 2006) the company listed $70.9 million in cash and roughly $12.4 million in liabilities. After adding the $99.7 million in intangibles and the rest of the assets, it had total assets of $183.39 million. So, its balance sheet just went from very healthy to incredible.

Usually shareholders do not greet dilution from a stock offering with much love, but for longer-term investors the company just made the equivalent of a debt elimination and gave itself the ability to fund many more royalty projects without sacrificing its dividend.

Dividend Growth and Market Capitalization
In 2004, it paid 15 cents in annualized quarterly dividends. The dividend grew to 20 cents in 2005 and to 22 cents in 2006. It paid out a 26 cent annualized dividend in January, so if this level holds, it will have a dividend yield of roughly 0.9% at current prices. One thing investors love to see is steady dividend growth, and, while this is a small nominal dividend, it is better than most gold miners'. Its market cap is now more than $700 million, which moves it closer and closer to the $1 billion that many analysts use as a floor before initiating coverage.

Stock History and Metrics
Trading in the $30 range, the stock is in the middle of its $23 to $37.50 trading range over the last 52 weeks. In early 2006, it briefly traded north of $40.00, and it also traded under $10.00 five years ago.

Its trailing P/E ratio of 44 doesn't make it cheap, but those are a bit hard to compare directly and it still has the growth and acquisition story behind it. It still trades at close to three-times stated book value, but that is under many of the gold growth stocks (because of the royalty status).

What Could Derail This?
If you ever met a gold company whose following is not tied mostly to the price of gold, then it must not be a real company. As gold prices grow, interest in the second- and third-tier gold companies skyrockets. However, when gold prices start falling rapidly or get too low then finding gold stock investors becomes a chore.

The situation is probably no different here. Its dividends will obviously depend on its royalty streams. The recent influx of IPOs in master limited partnerships and other "Trust" securities in the last few years has also helped the public understand the company, but, if investor comfort-levels start to exit, then one could also see some investors exit from this stock.

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