Royal Gold's Swiss Tax Holiday

Issue 141, September 2015

Royal Gold's winning all the big deals it seems.

Based in Denver, the company is the third largest streaming group by market cap, trailing Franco-Nevada and Silver Wheaton, but in the last 6 months it has announced hefty new streaming agreements with Teck, New Gold and Golden Star in Chile, Canada and Ghana.

In August, it also struck a $610m deal with Barrick Gold over the Pueblo Viejo mine in the Dominican Republic, currently the world's largest gold mine, which has long been coveted for a streaming deal by rival Silver Wheaton.

In total, Royal Gold's chief executive Tony Jensen has deployed $1.2bn since May, versus $900m deployed by Silver Wheaton this year and around $35m by Franco-Nevada.

Hard Rock

According to brokers who have been briefed by the company, Royal Gold's romp of recent deals is being driven by two things.

In 2010, the company struck a $312m streaming deal over gold byproduct from the Mount Milligan copper mine in British Columbia, owned by molybdenum miner, Thompson Creek Metals. But as construction costs ballooned from C$915m to over C$1.5bn ($1.1bn), Royal Gold dipped into its credit facilities and doubled-down on the transaction twice, lifting the total deal cost to $782m.

Battling hard rock and insufficient crushing power, the mine has failed to meet nameplate capacity, which is no longer expected before the end of this year. “The mills were turning,” wrote analysts at RBC after a site visit, “but slowly.”

Mount Milligan

Mount Milligan nonetheless accounts for an uncomfortable 34 per cent of Royal Gold's attributable production, according to an update last month.

The weight of the mine in Royal Gold's portfolio has forced it into regular status updates, news that royalty and streaming investors, who are meant to be divorced from the nitty-gritty details of a mine start-up plan, are unaccustomed to hearing.

To diversify the company away from Mount Milligan, it is now trying to bulk-up elsewhere, diluting Mount Milligan down, Tony Jensen told fund managers in a meeting in Toronto in June. As capital allocation goes, it is less than ideal: having over-exposed itself to one asset, management is quickly shipping-in others.

Di-Worsify

Rather than bulk-up on small deals, a shotgun approach, Royal Gold appears to be letting off its elephant gun like an automatic rifle.

Through its deals with Barrick and Teck, the company has gone from having one asset represent more than a third of its value to having three mines account for more than 20 per cent each. Mount Milligan has been diluted down, but arguably the company has tripled its chances of a major mine disruption.

In its eagerness to swallow new assets, Royal Gold has outbid competitors, whilst hiring new staff in Switzerland and Toronto, poaching Jason Hynes, a former M&A advisor at National Bank, from Sabina Gold & Silver. It also relinquished “first-lien security” on its Pueblo Viejo deal with Barrick, meaning it has limited recourse to the parent company if either Barrick or the stream payments falter.

Royal Gold's share price has meanwhile dropped 30 per cent this year, whilst Jensen sold $1.4m of stock last week...

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“The mills were turning… but slowly.”

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