Royal Gold (NASDAQ: RGLD) has made several decisions in the past several months to increase its output. Is the company’s production expected to rise in 2014? Also, what are the perils the company may face in regards to its production?
Royal Gold entered into several new royalty and streaming agreements early this year including: a 1.0% royalty from Barrick’s Goldrush deposit in Nevada; royalty interests in Barrick’s Cortez gold mine in Nevada; and a $75 million gold stream agreement with Rubicon Minerals to finance the construction of the Phoenix gold project in Ontario, Canada. These projects are likely to improve Royal Gold’s production in 2014.
Besides new mines, the company also estimates several of its mines will increase their production this year, specifically the Peñasquito mine — Royal Gold’s collaboration with Goldcorp (NYSE: GG). Even though this mine’s gold production remained nearly unchanged in the past couple of years at around 400,000 ounces, in 2014, Goldcorp projects the mining in the higher grade portion will continue. Moreover, throughput of 110,000 tons per day is projected to be added in 2014. As a result, the gold production is estimated to rise to 545,000 ounces — nearly 38% increase, year over year. Royal Gold also purchased last year a mine in Mt.Milligan. The company already received 2,149 ounces of gold in the first quarter of 2014 from this mine and expects the stream will rise in the coming quarters.
Despite these encouraging figures, several mines such as Andacollo are expected to further reduce their production. Such mines could offset the rise in production from Peñasquito, Mt.Milligan and the new purchases.
But if the company continues to purchase new projects in the coming months, its total production is likely to rise on a yearly scale. After all, the company has a working capital surplus of $704.8 million, a current-assets-to-liabilities ratio of nearly 30 to 1, and $450 million under its revolving credit line. This means, the company has more than enough funds to purchase new projects.
One company that could slowdown Royal Gold’s rise in production is Barrick Gold (NYSE: ABX). Barrick’s financial problems have resulted in the company reducing its capital expenditure and production. Specifically, Barrick Gold decided to temporarily suspend construction activities at Pascua-Lam. Royal Gold holds a royalty contract on the Chilean side of the Pascua-Lama project. Even though Royal Gold doesn’t have any capital or other production costs with this project, Barrick Gold’s decision might delay the royalty payments to Royal Gold.
If Barrick Gold decides to reduce its production in other projects, this could also cut down Royal Gold’s royalty payments in 2014.
Silver Wheaton (NYSE: SLW) is also facing similar problems with Barrick Gold. Due to Barrick Gold’s decision vis-à-vis Pascua-Lam, Silver Wheaton updated its production guidance so that the mine will start to produce in late 2017 and not in December 2016. In exchange for this delay, Silver Wheaton will receive silver from Barrick Gold’s other mines. Thus, even though, this decision won’t affect Silver Wheaton’s silver stream, this raises the possibility of Barrick Gold unable to complete the construction of Pascua-Lam, which could make the deals with Royal Gold and Silver Wheaton void.
Royal Gold is plausibly among the better investments to consider for investors who seek to have precious metals in their portfolio. The company also takes great strides in increasing its production with new projects. Finally, investors should also consider the potential decline in production related to some of Royal Gold’s mines and the potential delays related to Barrick Gold’s mines.
For further reading:
- Will Gold Recover from its Recent Fall?
- What Could Impede This Gold Company?
- Will The Gold Market Continue to Cool Down?
- Will Gold Continue to Dwindle?
Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.