Royal Gold Stock: Investment in Cortez will pay off (NASDAQ: RGLD)

Introduction

Denver-based Royal Gold Inc. (NASDAQ:RGLD) is one of the most prolific streamers I’ve regularly covered on Seeking Alpha since September 2018.

This article covers recent 2Q22 results released on August 4, 2022 and all new information. My previous post on RGLD was released on May 12, 2022.

The objective is to obtain a real view of the balance sheet to choose the perfect investment strategy.

1 – Overview of 2Q22 results and recent activity

Royal Gold recorded net earnings of $71.14 million or $1.08 per diluted share compared to $81.88 million or $1.24 per basic and diluted share for the three months ended June 30, 2022. Adjusted earnings per share were $0.81 in the second quarter of 2022, below analysts’ expectations.

The increase is attributable to higher revenues, with an average gold price of $1,877 per ounce, an average silver price of $24.01 per ounce and an average copper price of $4. $.53 per pound.

Royal Gold generates revenue from its royalty and stream interests, accounting for 28.3% and 71.7%. The company is heavily dependent on the price of gold, which accounts for 71% of total revenue in 2Q22.

Gold equivalent production for 2T22 was 78,300 GEO.

Royal Gold has an excellent leverage profile with net cash of $280.62 million and $1.276 billion in cash. However, on July 25, 2022, Royal Gold drew $500 million from the credit facility, leaving $500 million undrawn and available.

2 – Investment thesis

The investment thesis has remained unchanged for years. The temporary weakness in production in 2Q22 should not be a long-term problem.

Royal Gold is a great long-term investment with deep cash at around $776 million after funding the complex Cortez royalty acquisition and long-term growth with the big Bear Lake project.

The company has net cash of $280.62 million. Below is information on the Bear Lake project.

However, I don’t own RGLD as I already own FNV, WPM and SAND, but it’s one of the strongest along with Franco Nevada and Wheaton Precious Metals.

A negative characteristic of the streamer segment is that stocks do not provide enough dividends.

Due to the volatility attached to this stream and royalty company, I recommend the short-term trade LIFO, 30% of your long-term position.

This dual strategy has been my market strategy, “The Gold and Oil Wedge”, and I believe is the best way to maximize your gain over a long period of time.

Note: Only US investors can trade LIFO. Read my final note at the end of this article.

3 – Stock market performance

Royal Gold has fallen significantly since May after the FED decided to raise interest by 75 basis points and signaled further increases. In July, the FED increased its interest by another 75 points. Royal Gold is down 10.5% YoY.

CEO William Heissenbuttel said on the conference call:

The second quarter was a good quarter from an operational perspective, and lower production from some properties was expected when we released our guidance for calendar year 2022. Our financial results were strong with healthy revenues of $146 million. Strong operating cash flow of $120 million and earnings of $71 million. Adjusted profit was $54 million.

Royal Gold Inc.: 1Q22 balance sheet and production. The raw numbers

royal gold	2Q21	3Q21	4Q21	1Q22	2Q22
Total revenue in millions of dollars	168.03	174.43	168.52	162.36	146.44
Net income in millions of dollars	81.68	70.18	68.16	65.68	71.14
EBITDA in millions of dollars	136.63	139.01	132.30	130.15	110.82
Diluted EPS in $/share	1.24	1.07	1.04	1.00	1.08
Cash flow from operations in millions of dollars	120.85	129.89	118.90	101.13	120.20
Capital expenditures in millions of dollars	85.66	265.00	16.07	37.80	0.04
Free cash flow in millions of dollars	35.19	-135.12	102.83	63.33	120.16
Total cash in millions of dollars	225.92	160.21	143.55	183.71	280.62
Long-term debt in millions of dollars	0	95.40	0	0	0
Dividend per share in $	0.30	0.35	0.35	0.35	0.35
Shares outstanding (diluted) in millions	65.64	65.63	65.62	65.65	65.68
Gold production	2Q21	3Q21	4Q21	1Q22	2Q22
Production of K Geo gold equivalent ounce	92.4	97.4	93.9	86.5	78.3
Realized Gold Price $/Oz	1,825	1,790	1,794	1,877	1,871

Click to enlarge

The data source: Company press release and Fun Trading.

Analysis: revenue, profit details, free cash flow, debts and production details

1 – Revenue was $146.44 million in 2Q22

As of June 30, 2022, Royal Gold reported total revenue of $146.44 million, comprising stream revenue of $104.9 million and royalty revenue of $41.6 million at an average price of l gold of $1,871 an ounce.

The decrease in total revenues is primarily the result of lower gold sales at Andacollo and Pueblo Viejo and lower gold production at Cortez and Peñasquito. The decrease was offset by $9.4 million of new revenue from NX Gold and Khoemacau streams, which did not provide streams to Royal Gold in the prior year quarter. (Press release)

Net income for the quarter was $71.14 million or $1.08 per diluted share, compared to $81.88 million or $1.24 per diluted share last year.

2 – Free cash flow was $120.16 million in 2Q22

Note: Free cash flow is cash flow from operating activities less capital expenditures.

Quarterly free cash flow was $120.16 million in 2Q22, and trailing 12-month free cash flow was $151.20 million.

The the quarterly dividend was set at $0.35 per share for 2022, covered by free cash flow.

3 – Debt-free and ~$1.3 billion in cash at end-June 2022.

Revenue split: 71% gold / 14% copper / 11% silver / 4% other

The average gold price was $1,871 per ounce, the average silver price was $22.60 per ounce, and the average copper price was $4.31 per pound.

Average prices this quarter:

1. $1,871 per ounce of gold
2. $22.60 per ounce of silver
3. $4.31 per pound for copper

Technical analysis (short term) and commentary

Note: Chart is adjusted for dividend.

GDPR forms a down channel model with resistance at $102.5 and support at $95. A descending channel pattern is often considered bullish and ends with a breakout.

The short-term trading strategy remains the same as in my previous article. I suggest trading LIFO for around 30% of your position. I recommend selling between $102 and $104.4 with potentially higher resistance at $113.1 and waiting for a retracement between $97 and $94.

Trading LIFO allows you to sell your most recent purchases, assuming a profit (of course) while keeping your long-term position underwater until the stock has appreciated enough to consider selling your position. main.

LIFO trading involves taking small profits using the chart pattern and repeating it often. However, don’t sell at a loss and manage your cash flow.

Sometimes the weekly trend can stretch for a month or even more, and it is reasonable to accumulate more and be patient.

The FED’s hawkish action on interest rates has hurt the gold mining sector significantly more than gold bullion, which still trades at $1,750 an ounce. The next Fed decision could reinforce this trend, and further weakness could emerge. In this case, I see support below $92.

Watch gold like a hawk.

To note: The LIFO method is prohibited by International Financial Reporting Standards (IFRS), although it is permitted in the United States under generally accepted accounting principles (GAAP). Therefore, only US traders can apply this method. Those who cannot trade LIFO can create two different accounts for the same security, one for long term and one for short term trading.

Warning: The TA table must be updated frequently to be relevant. This is what I do in my stock tracker. The table above has a possible validity of approximately one week. Remember that the TA chart is a tool only to help you adopt the right strategy. This is no way to predict the future. Nobody and nothing can.

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