Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General Presentation
This Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) generally discusses year-to-year comparisons between the year ended December 31, 2022 and the comparative year ended December 31, 2021. Due to our change in fiscal year from June 30 to December 31, the comparative year ended December 31, 2021 was unaudited. A discussion of the changes in our financial condition and results of operations for the six months ended December 31, 2021 transition period and fiscal years ended June 30, 2021 and 2020 have been omitted from this report, but may be found in Item 7. MD&A, of our Annual Reports on Form 10-K for the six month transition period ended December 31, 2021 and for the years ended June 30, 2021 and 2020, filed with the SEC on February 17, 2022, August 12, 2021 and August 6, 2020, respectively, which are available free of charge on the SEC’s website at www.sec.gov and our website at www.royalgold.com.
Overview of Our Business
We acquire and manage precious metal streams, royalties, and similar interests. We seek to acquire existing stream and royalty interests or finance projects that are in production, development or exploration stage in exchange for stream or royalty interests.
We manage our business under two segments:
● Acquisition and Management of Stream Interests — A metal stream is a purchase agreement that provides, in exchange for an upfront deposit payment, the right to purchase all or a portion of one or more metals produced from a mine, at a price determined for the life of the transaction by the purchase agreement. As of December 31, 2022, we owned nine stream interests, which are on eight production stage properties and one development stage property. Stream interests accounted for 69% and 67% of our total revenue for the years ended December 31, 2022 and 2021, respectively. We expect stream interests to continue representing a significant portion of our total revenue.
● Acquisition and Management of Royalty Interests — Royalties are non-operating interests in mining projects that provide the right to revenue or metals produced from the project after deducting specified costs, if any. As of December 31, 2022, we owned royalty interests on 32 production stage properties, 18 development stage properties and 123 exploration stage properties, of which we consider 52 to be evaluation stage projects. We use “evaluation stage” to describe exploration stage properties that contain mineral resources and on which operators are engaged in the search for mineral reserves. Royalty interests accounted for 31% and 33% of our total revenue for the years ended December 31, 2022 and 2021, respectively.
We do not conduct mining operations on the properties in which we hold stream and royalty interests, and we generally are not required to contribute to capital costs, exploration costs, environmental costs or other operating costs on those properties.
We are continually reviewing opportunities to grow our portfolio, whether through the creation or acquisition of new or existing stream or royalty interests or other acquisition activity. We generally have acquisition opportunities in various stages of review. Our review process may include, for example, engaging consultants and advisors to analyze an opportunity; analysis of technical, financial, legal, and other confidential information of an opportunity; submission of indications of interest and term sheets; participation in preliminary discussions and negotiations; and involvement as a bidder in competitive processes.
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Business Trends and Uncertainties
Metal Prices
Our financial results are primarily tied to the price of gold, silver, copper, and other metals. Metal prices have fluctuated widely in recent years, and we expect this volatility to continue. The marketability and price of metals are influenced by numerous factors beyond our control, and significant changes in metal prices can have a material effect on our revenue.
For the years ended December 31, 2022, and 2021, the average prices and percentages of revenue by metal were as follows:
Year Ended
December 31, 2022
December 31, 2021
Metal
Average
Price
Percentage
of Revenue
Average
Price
Percentage
of Revenue
Gold ($/ounce) (1)
$
1,800
73%
$
1,799
73%
Silver ($/ounce) (1)
$
21.73
11%
$
25.14
11%
Copper ($/pound) (2)
$
3.99
12%
$
4.23
12%
Other
N/A
4%
N/A
4%
(1) Based on the average LBMA Price for the period.
(2) Based on the average LME Price for the period.
Acquisition of Additional Royalty Interests on Cortez Complex
On December 29, 2022, we acquired two portions of a gross smelter return royalty (the “Idaho Royalty”) that together cover a large area including the Cortez mine operational area and the entirety of the Fourmile development project in Nevada (the “Cortez Complex”) from certain holders who are successors in interest to Idaho Mining Corporation for cash consideration of $204.1 million. The area within the Cortez Complex is owned or controlled by Nevada Gold Mines LLC (“NGM”), a joint venture between Barrick Gold Corporation (“Barrick”) and Newmont Corporation (“Newmont”), with the exception of the Fourmile development project which is 100% owned and operated by Barrick. The Idaho Royalty comprises a 0.24% gross royalty that covers areas including the Pipeline and Crossroads deposits and a 0.45% gross royalty that covers areas including the Cortez Hills, Goldrush, Fourmile and Robertson deposits. The Idaho Royalty is life of mine, not subject to any stepdowns or caps, and has no applicable deductions. The purchase price was funded with amounts available under the revolving credit facility and cash on hand.
The economic effective date for the transaction was December 1, 2022, and revenue of $0.7 million on production of approximately 116,000 ounces attributable to the royalty was recognized in the fourth quarter of 2022.
Acquisition of Great Bear Royalties Corp.
On September 9, 2022 we completed the acquisition of all of the issued and outstanding shares of Great Bear Royalties Corporation (“GBR”) for cash consideration of approximately C$199.6 million (US$151.7 million) (the “Acquisition Price”). GBR’s sole material asset is a 2.0% net smelter return royalty (“Great Bear Royalty”) that covers the entirety of the Great Bear Project in the Red Lake district of Ontario, Canada, owned and operated by a subsidiary of Kinross Gold Corporation (“Kinross”). The Great Bear Royalty includes all metals produced from contiguous claims covering 9,140 hectares. Royalty payments will be made quarterly with applicable standard deductions. Refer to Note 3 of our notes to consolidated financial statements for further discussion on the GBR acquisition. The purchase price was funded with available cash on hand. As part of the acquisition and in exchange for information and access to the project provided by Kinross, we granted an option to Kinross to purchase a 25% interest in the Great Bear Royalty (0.5% of the 2.0% royalty rate) for an amount equal to 25% of the Acquisition Price, adjusted for inflation, at any time from the transaction closing date until the earlier of a construction decision for the Great Bear Project and 10 years after the transaction closing date.
On February 13, 2023, Kinross announced an initial mineral resource of 5 million ounces of gold (2.7 million ounces Indicated, 2.3 million ounces Inferred) at the Great Bear Project based on drilling to an approximate depth of 500 meters.
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Kinross expects 2023 activity to include drilling of 180,000 meters at depth, along strike and on parallel structures to support engineering studies and permitting activities.
Acquisition of Gross Royalty on Cortez Complex
On August 2, 2022, we acquired a sliding scale gross royalty (the “Rio Tinto Royalty”) on production from an area within the Cortez Complex for cash consideration of $525 million. The area within the Cortez Complex is owned or controlled by NGM, with the exception of the Fourmile development project which is 100% owned and operated by Barrick. The royalty is a life of mine sliding scale gross royalty payable at a rate of 0% at a gold price less than $400 per ounce, increasing to 3% at a gold price above $900 per ounce, and is payable on 40% of all production from the Cortez Complex except for the existing deposits within the Robertson property. The purchase price was funded with debt and available cash on hand.
For the year ended December 31, 2022, we received revenue of $4.5 million on production of approximately 227,000 ounces attributable to the Rio Tinto Royalty.
Lawyers Royalty Acquisition
On March 24, 2022, we acquired a 0.5% net smelter returns royalty (“NSR”) on production from the Lawyers Project, currently operated by Benchmark Metals Inc., which is located in British Columbia, Canada. As part of this transaction, we also acquired a right of first offer (“ROFO”) for an existing 2.0% NSR royalty over the Ranch Project owned by Thesis Gold, Inc. that is located adjacent to the Lawyers Project. We paid $8.0 million in cash consideration for the royalty and ROFO to Guardsmen Resources Inc. The Lawyers Project acquisition has been accounted for as an asset acquisition.
Khoemac a u Silver Stream
On February 23, 2022, we made an advance payment of $10.0 million toward the option stream which increased our right to receive payable silver produced from Khoemac a u from 90% to 93%, and on March 14, 2022, we made our final advance payment of $16.5 million toward the option stream which increased our right to receive payable silver produced from 93% to 100%.
Operators’ Production Estimates by Stream and Royalty Interest for Calendar 2022
We received annual production estimates from many of the operators of our producing mines during the first calendar quarter of 2022. In some instances, an operator may revise its original calendar year guidance throughout the year. The following table shows these production estimates for our principal producing properties for calendar 2022 as well as the actual production reported to us by the various operators through December 31, 2022. The estimates and production reports are prepared by the operators. We do not participate in the preparation or calculation of the operators’ estimates or production reports and have not independently assessed or verified, and disclaim all responsibility for, the accuracy of this information. Please refer to Part I, Item 2, Properties, of this report for further discussion on any updates at our principal producing properties.
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Operators’ Estimated and Actual Production by Stream and Royalty Interest for Calendar Year 2022
Principal Production Stage Properties
Calendar Year 2022 Operator’s Production
Calendar Year 2022 Operator’s Production
Estimate (1)
Actual (2)
Gold
Silver
Base Metals
Gold
Silver
Base Metals
Stream/Royalty
(oz.)
(oz.)
(lbs.)
(oz.)
(oz.)
(lbs.)
Stream:
Andacollo (3)
36,000
25,900
Mount Milligan (4)
190,000 - 210,000
189,000
Copper
70 - 80 Million
74 Million
Pueblo Viejo (5)
400,000 - 440,000
N/A
428,000
N/A
Khoemac a u (6)
N/A
N/A
Royalty:
Cortez (7)
280,000
300,000
Peñasquito (8)
475,000
29 Million
440,000
23.3 Million
Lead
150 Million
112 Million
Zinc
350 Million
297 Million
(1) Production estimates received from our operators are for calendar year 2022. Please also refer to our cautionary language regarding forward-looking statements following this MD&A, as well as the Risk Factors identified in Part I, Item 1A, of this report for information regarding factors that could affect actual results.
(2) Actual production figures shown are from our operators and cover the period January 1, 2022, through December 31, 2022, unless otherwise noted in footnotes to this table.
(3) The estimated and actual production figures shown for Andacollo are contained gold in concentrate.
(4) The estimated and actual production figures shown for Mount Milligan are payable gold and copper in concentrate.
(5) The estimated and actual production figures shown for Pueblo Viejo are payable gold in doré and represent the 60% interest in Pueblo Viejo held by Barrick. Barrick did not provide estimated or actual silver production.
(6) The estimated and actual production figures for Khoemac a u are not available through the ramp-up period.
(7) The estimated and actual production figures for Cortez represent the Cortez Legacy Zone area only.
(8) The estimated and actual gold and silver production figures shown for Peñasquito are payable gold and silver in concentrate and doré. The estimated and actual lead and zinc production figures shown are payable lead and zinc in concentrate. The actual production figure is for the period January 1, 2022 through September 30, 2022.
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Results of Operations
Year Ended December 31, 2022, Compared with Year Ended December 31, 2021 (In thousands, except share data)
Years Ended
December 31,
December 31,
2021
2022
(unaudited)
Revenue
$
603,206
$
653,568
Costs and expenses
Cost of sales (excludes depreciation, depletion and amortization)
94,642
98,467
General and administrative
34,612
29,306
Production taxes
7,021
8,399
Depreciation, depletion and amortization
178,935
189,009
Impairment of royalty interests
4,287
—
Total costs and expenses
319,497
325,181
Operating income
283,709
328,387
Fair value changes in equity securities
(1,503)
2,510
Interest and other income
7,832
3,019
Interest and other expense
(17,170)
(5,753)
Income before income taxes
272,868
328,163
Income tax expense
(32,926)
(53,223)
Net income and comprehensive income
239,942
274,940
Net (income) loss and comprehensive (income) loss attributable to non-controlling interests
(960)
(898)
Net income and comprehensive income attributable to Royal Gold common stockholders
$
238,982
$
274,042
Basic earnings per share
$
3.64
$
4.17
Basic weighted average shares outstanding
65,576,995
65,552,586
Diluted earnings per share
$
3.63
$
4.17
Diluted weighted average shares outstanding
65,661,748
65,624,007
Cash dividends declared per common share
$
1.425
$
1.25
For the year ended December 31, 2022, we recorded net income attributable to Royal Gold stockholders of $239.0 million, or $3.64 per basic share and $3.63 per diluted share, as compared to net income attributable to Royal Gold stockholders of $274.0 million, or $4.17 per basic and diluted share, for the year ended December 31, 2021. The decrease in net income was primarily due to lower revenue and higher interest expense as a result of higher amounts outstanding under our revolving credit facility compared to the prior period. This decrease was partially offset by a decrease in income tax expense as discussed in further detail below.
For the year ended December 31, 2022, we recognized total revenue of $603.2 million, which is comprised of stream revenue of $417.8 million and royalty revenue of $185.4 million, at an average gold price of $1,800 per ounce, an average silver price of $21.73 per ounce and an average copper price of $3.99 per pound, compared to total revenue of $653.6 million, which is comprised of stream revenue of $436.3 million and royalty revenue of $217.3 million, at an average gold price of $1,799 per ounce, an average silver price of $25.14 per ounce and an average copper price of $4.23 per pound, for the year ended December 31, 2021.
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Revenue and the corresponding production attributable to our stream and royalty interests, for the year ended December 31, 2022 compared to the year ended December 31, 2021 is as follows:
Revenue and Reported Production Subject to our Stream and Royalty Interests
Year Ended December 31, 2022 and 2021
(In thousands, except reported production in oz. and lbs.)
Year Ended
Year Ended
December 31, 2022
December 31, 2021
Reported
Reported
Stream/Royalty
Metal(s)
Revenue
Production (1)
Revenue
Production (1)
Stream (2) :
Mount Milligan
$
180,543
$
173,114
Gold
67,800
oz.
61,400
oz.
Copper
14.8
Mlbs.
14.9
Mlbs.
Pueblo Viejo
$
85,863
$
109,716
Gold
33,200
oz.
40,600
oz.
Silver
1.2
Moz.
1.4
Moz.
Andacollo
Gold
$
47,347
26,100
oz.
$
68,965
38,100
oz.
Khoemac a u
Silver
$
18,786
887,700
oz.
$
5,096
219,100
oz.
Other (3)
$
85,254
$
79,427
Gold
44,400
oz.
38,300
oz.
Silver
255,400
oz.
407,700
oz.
Total stream revenue
$
417,793
$
436,318
Royalty (2) :
Cortez Legacy Zone
Gold
$
47,769
299,800
oz.
$
56,116
361,300
oz.
Cortez CC Zone
Gold
$
2,790
114,400
oz.
N/A
N/A
Peñasquito
$
43,165
$
52,959
Gold
572,600
oz.
709,600
oz.
Silver
29.7
Moz.
31.8
Moz.
Lead
146.8
Mlbs.
173.3
Mlbs.
Zinc
373.1
Mlbs.
433.3
Mlbs.
Other (3)
Various
$
91,689
N/A
$
108,175
N/A
Total royalty revenue
$
185,413
$
217,250
Total Revenue
$
603,206
$
653,568
(1) Reported production relates to the amount of metal sales, subject to our stream and royalty interests, for the year ended December 31, 2022 and 2021, and may differ from the operators’ public reporting.
(2) Refer to Item 2, Properties, for further discussion on our principal stream and royalty interests.
(3) Individually, with the exception of the Rainy River stream (5.3% for the year ended December 31, 2022 and 5.7% for the year ended December 31, 2021) and Wassa (5.2% for the year ended December 31, 2022), no stream or royalty included within the “Other” category contributed greater than 5% of our total revenue for either period.
The decrease in our total revenue for the year ended December 31, 2022, compared with year ended December 31, 2021, resulted primarily from lower gold sales at Andacollo, lower gold and silver sales at Pueblo Viejo and lower gold production at Cortez and Peñasquito. These decreases were partially offset by an increase in gold sales at Mount Milligan and Xavantina, higher silver sales at Khoemac a u and $5.2 million of revenue from the newly acquired royalties at Cortez compared to the prior period.
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Gold and silver ounces and copper pounds purchased and sold during the year ended December 31, 2022 and 2021, as well as gold, silver and copper in inventory as of December 31, 2022 and 2021, for our stream interests were as follows:
Year Ended
Year Ended
As of
As of
December 31, 2022
December 31, 2021
December 31, 2022
December 31, 2021
Gold Stream
Purchases (oz.)
Sales (oz.)
Purchases (oz.)
Sales (oz.)
Inventory (oz.)
Inventory (oz.)
Mount Milligan
68,900
67,800
61,600
61,400
5,200
4,100
Pueblo Viejo
32,500
33,200
38,700
40,600
7,900
8,600
Andacollo
27,700
26,200
37,600
38,100
3,800
2,200
Other
44,600
44,300
38,000
38,300
4,100
3,800
Total
173,700
171,500
175,900
178,400
21,000
18,700
Year Ended
Year Ended
As of
As of
December 31, 2022
December 31, 2021
December 31, 2022
December 31, 2021
Silver Stream
Purchases (oz.)
Sales (oz.)
Purchases (oz.)
Sales (oz.)
Inventory (oz.)
Inventory (oz.)
Pueblo Viejo
1,238,600
1,216,700
1,346,500
1,448,600
337,800
316,000
Khoemacau
951,500
887,700
261,100
219,100
105,900
42,000
Other
238,600
255,400
375,700
407,700
17,500
34,300
Total
2,428,700
2,359,800
1,983,300
2,075,400
461,200
392,300
Year Ended
Year Ended
As of
As of
December 31, 2022
December 31, 2021
December 31, 2022
December 31, 2021
Copper Stream
Purchases (Mlbs.)
Sales (Mlbs.)
Purchases (Mlbs.)
Sales (Mlbs.)
Inventory (Mlbs.)
Inventory (Mlbs.)
Mount Milligan
14.8
14.8
14.9
14.9
0.9
0.9
Cost of sales decreased to $94.6 million for the year ended December 31, 2022, from $98.5 million for the year ended December 31, 2021. The decrease was primarily due to a decrease in gold sales at Andacollo and a decrease in gold and silver sales at Pueblo Viejo when compared to the prior period. This decrease was partially offset by an increase in gold sales at Mount Milligan when compared to the prior period. Cost of sales, which excludes depreciation, depletion and amortization, is specific to our stream agreements and is the result of our purchase of gold, silver and copper for a cash payment. The cash payment for gold from Mount Milligan is the lesser of $435 per ounce or the prevailing market price of gold when purchased, while the cash payment for our other streams is a set contractual percentage of the gold, silver or copper (Mount Milligan) spot price near the date of metal delivery.
General and administrative costs increased to $34.6 million for year ended December 31, 2022, from $29.3 million for the year ended December 31, 2021. The increase was primarily due to higher employee related costs and non-cash stock compensation expense.
Depreciation, depletion and amortization decreased to $178.9 million for the year ended December 31, 2022, from $189.0 million for the year ended December 31, 2021. The decrease was primarily due to lower depletion rates at Mount Milligan compared to the prior period. Refer to Note 4 of our notes to consolidated financial statements for further discussion on the decrease in depletion rates at Mount Milligan. This decrease was partially offset by additional depletion from Khoemac a u which produced first deliveries in the September 30, 2021 quarter.
During the year ended December 31, 2022, we recognized an impairment loss of $4.3 million on the carrying value of a non-principal exploration stage royalty due to new legal information received. Refer to Note 4 of our notes to consolidated financial statements for further discussion on the impairment.
We recognized a loss in fair value changes in equity securities of $1.5 million for the year ended December 31, 2022, compared to a gain in fair value changes in equity securities of $2.5 million for the year ended December 31, 2021. The change was primarily due to a decrease in the fair value of marketable equity securities as discussed further in Note 5 of our notes to consolidated financial statements.
Interest and other expense increased to $17.2 million for the year ended December 31, 2022, from $5.8 million for the year ended December 31, 2021. The increase in the current period was primarily attributable to higher interest expense as a
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result of higher average amounts outstanding under our revolving credit facility and higher interest rates when compared to the prior period. Refer to Note 6 of our notes to consolidated financial statements for further discussion on our debt.
Income tax expense was $32.9 million for the year ended December 31, 2022, as compared to $53.2 million for the year ended December 31, 2021, which resulted in an effective tax rate of 12.1% in the current period and 16.2% in the prior period. The effective tax rate for the year ended December 31, 2022, was primarily impacted by the release of a valuation allowance on certain foreign deferred tax assets. The effective tax rate for the year ended December 31, 2021, was impacted by the release of uncertain tax positions resulting from a settlement agreement with a foreign tax authority and a change in estimates, partially offset by a foreign tax rate adjustment resulting in a revaluation of certain deferred tax assets.
Liquidity and Capital Resources
We use our liquidity and capital resources to fund dividends and for the acquisition of stream and royalty interests, including any conditional funding schedules. Our short-term and long-term capital requirements are primarily affected by our ongoing acquisition activities. We currently, and generally at any time, have acquisition opportunities in various stages of active review. In the event of one or more substantial stream or royalty interest or other acquisitions, we may seek additional debt or equity financing as necessary. We occasionally borrow and repay amounts under our revolving credit facility and may do so in the future. We believe that our current liquidity and capital resources will be adequate to cover our operating needs for the foreseeable future.
At December 31, 2022, we had working capital of $122.2 million, including $118.6 million of cash and equivalents. This compares to working capital of $154.6 million, including $143.6 million of cash and equivalents at December 31, 2021. The decrease in our working capital was primarily attributable to the acquisition of royalty and stream interests during the year ended December 31, 2022, which is discussed further below under “Summary of Cash Flows.”
During the year ended December 31, 2022, liquidity needs were met from $417.3 million in net cash provided by operating activities and our available cash resources. Working capital, combined with the $425 million of available capacity under our revolving credit facility, resulted in approximately $547.2 million of total liquidity at December 31, 2022. Refer to Note 6 of our notes to consolidated financial statements and below (“Recent Liquidity and Capital Resource Developments”) for further discussion on our debt.
At year ended December 31, 2022, our contractual cash obligations are solely comprised of operating leases. We believe we will be able to fund all current cash obligations from net cash provided by operating activities. For additional information on our operating leases, see Note 7 of our notes to consolidated financial statements.
Please refer to our risk factors included in Part I, Item 1A of this report for a discussion of certain risks that may impact our liquidity and capital resources.
Recent Liquidity and Capital Resource Developments
Revolving Credit Facility Drawdown
On July 2, 2022, we borrowed $500 million under our revolving credit facility for the acquisition of the Rio Tinto Royalty, and on September 6, 2022, we repaid $50 million of the outstanding borrowings. Refer to Note 3 of our notes to consolidated financial statements for further discussion on the Rio Tinto Royalty acquisition.
On December 6, 2022, we repaid $75 million of outstanding borrowings on our revolving credit facility, and on December 28, 2022 we borrowed $200 million for the acquisition of the Idaho Royalty. Refer to Note 3 of our notes to consolidated financial statements for further discussion on the acquisition of the Idaho Royalty. As of December 31, 2022, we had $575 million outstanding under our revolving credit facility.
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Dividend Increase
On November 15, 2022, we announced an increase in our annual dividend for calendar year 2023 from $1.40 to $1.50 per share, payable on a quarterly basis of $0.375 per share. The newly declared dividend is 7% higher than the dividend paid during calendar year 2022. We have steadily increased our annual dividend for 22 years, or since calendar year 2001. We expect to pay our annual dividend using cash on hand.
Summary of Cash Flows (In thousands)
Years Ended
December 31,
December 31,
2021
2022
(unaudited)
Cash flows from operating activities:
Net income and comprehensive income
$
239,942
$
274,940
Adjustments to reconcile net income and comprehensive income to net cash provided by operating activities:
Depreciation, depletion and amortization
178,935
189,009
Non-cash employee stock compensation expense
8,411
6,056
Fair value changes in equity securities
1,503
(2,510)
Deferred tax (benefit) expense
(19,836)
11,371
Impairment of royalty interests
4,287
—
Other
979
1,663
Changes in assets and liabilities:
Royalty receivables
4,683
(9,771)
Stream inventory
(1,049)
2,292
Income tax receivable
1,849
4,023
Prepaid expenses and other assets
(3,908)
(1,956)
Accounts payable
211
3,862
Income tax payable
(3,005)
(4,248)
Uncertain tax positions
—
(13,268)
Other liabilities
4,343
406
Net cash provided by operating activities
$
417,345
$
461,869
Cash flows from investing activities:
Acquisition of stream and royalty interests
(922,155)
(400,381)
Khoemac a u subordinated debt facility
—
(25,000)
Proceeds from sale of equity securities
—
8,651
Other
(721)
(241)
Net cash used in by investing activities
$
(922,876)
$
(416,971)
Cash flows from financing activities:
Repayment of debt
(125,000)
(300,000)
Borrowings from revolving credit facility
700,000
100,000
Net payments from issuance of common stock
(1,447)
(971)
Common stock dividends
(91,925)
(78,738)
Other
(1,062)
(3,497)
Net cash provided by (used in) financing activities
$
480,566
$
(283,206)
Net decrease in cash and equivalents
(24,965)
(238,308)
Cash and equivalents at beginning of period
143,551
381,859
Cash and equivalents at end of period
$
118,586
$
143,551
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Operating Activities
Net cash provided by operating activities totaled $417.3 million for the year ended December 31, 2022, compared to $461.9 million for the year ended December 31, 2021. The change was primarily due to a $35.9 million decrease in cash proceeds received from our stream and royalty interests, net of cost of sales, compared to the prior period.
Investing Activities
Net cash used in investing activities totaled $922.9 million for the year ended December 31, 2022, compared to net cash used in investing activities of $417.0 million for the year ended December 31, 2021. The increase over the prior period was primarily due to the GBR, Rio Tinto Royalty and Idaho Royalty acquisitions.
Financing Activities
Net cash provided by financing activities totaled $480.6 million for the year ended December 31, 2022, compared to net cash used in financing activities of $283.2 million for the year ended December 31, 2021. The change was primarily due to an increase in the debt outstanding for the year ended December 31, 2022 that was used to fund acquisitions of our new royalty interests at Cortez and the Great Bear Project compared to the prior period.
Critical Accounting Estimates
Use of Estimates
The preparation of our financial statements, in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”), requires management to make estimates and assumptions. These estimates and assumptions have a significant effect on reported amounts of assets and liabilities, revenue and expenses because they result primarily from the need to make estimates and assumptions on matters that are inherently uncertain.
We rely on mineral reserve and mineral resource estimates reported by the operators of the properties on which we hold stream and royalty interests. These estimates and the underlying assumptions affect the potential impairments of long-lived assets and the ability to realize income tax benefits associated with deferred tax assets. These estimates and assumptions also affect the rate at which we recognize revenue or charge depreciation, depletion and amortization to earnings. On an ongoing basis, management evaluates these estimates and assumptions; however, actual amounts could differ from these estimates and assumptions. Differences between estimates and actual amounts are adjusted and recorded in the period that the actual amounts are known.
Stream and Royalty Interests in Mineral Properties and Related Depletion
Stream and royalty interests include acquired stream and royalty interests in production, development and exploration stage properties. The costs of acquired stream and royalty interests are capitalized as tangible assets as such interests do not meet the definition of a financial asset.
Production stage stream and royalty interests are depleted using the units of production method over the life of the mineral property (as stream sales occur or royalty payments are recognized), which are estimated using proven and probable mineral reserves as provided by the operator. Development stage mineral properties, which are not yet in production, are not depleted until the property begins production. Exploration stage mineral properties, where there are no proven and probable mineral reserves, are not depleted. When the associated exploration stage mineral interests are converted to proven and probable mineral reserves, the mineral property becomes a development stage mineral property.
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Asset Impairment
We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts of an asset or group of assets may not be recoverable. The recoverability of the carrying value of stream and royalty interests in production and development stage mineral properties is evaluated based upon estimated future undiscounted net cash flows from each stream and royalty interest using estimates of proven and probable mineral reserves, mineral resources and other relevant information received from the operators. We evaluate the recoverability of the carrying value of royalty interests in exploration stage mineral properties in the event of significant decreases in the price of gold, silver, copper and other metals, and whenever new information regarding the mineral properties is obtained from the operator indicating that production will not likely occur or may be reduced in the future, thus potentially affecting the future recoverability of our stream or royalty interests. Impairments in the carrying value of each property are measured and recorded to the extent that the carrying value in each property exceeds its estimated fair value, which is generally calculated using estimated future discounted cash flows.
Estimates of gold, silver, copper, and other metal prices, and operators’ estimates of proven and probable mineral reserves or mineral resources related to our stream or royalty properties are subject to certain risks and uncertainties which may affect the recoverability of our investment in these stream and royalty interests in mineral properties. It is possible that changes could occur to these estimates, which could adversely affect the net cash flows expected to be generated from these stream and royalty interests. Refer to Note 4 of our notes to consolidated financial statements for a discussion of the impairment assessment results for the year ended December 31, 2022.
Revenue
A performance obligation is a promise in a contract to transfer control of a distinct good or service (or integrated package of goods and/or services) to a customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, a performance obligation is satisfied. In accordance with this guidance, revenue attributable to our stream and royalty interests is generally recognized at the point in time that control of the related metal production transfers to our customers, as described below. The amount of revenue we recognize further reflects the consideration to which we are entitled under the respective stream or royalty agreement. A more detailed summary of our revenue recognition policies for our stream and royalty interests is discussed below.
Stream Interests
A metal stream is a purchase agreement that provides, in exchange for an upfront deposit payment, the right to purchase all or a portion of one or more of the metals produced from a mine, at a price determined for the life of the transaction by the purchase agreement. Gold, silver and copper received under our metal stream agreements are taken into inventory, and then sold primarily using average spot rate gold, silver and copper forward contracts. The sales price for these average spot rate forward contracts is determined by the average daily gold, silver or copper spot prices during the term of the contract, typically a consecutive number of trading days between ten days and three months (depending on the frequency of deliveries under the respective stream agreement and our sales policy in effect at the time) commencing shortly after receipt and purchase of the metal. We settle our forward sales contracts via physical delivery of the metal to the purchaser (our customer) on the settlement date specified in the contract. Under our forward sales contracts, there is a single performance obligation to sell a contractually specified volume of metal to the purchaser, and we satisfy this obligation at the point in time of physical delivery. Accordingly, revenue from our metal sales is recognized on the date of settlement, which is the date that control, custody and title to the metal transfer to the purchaser.
Royalty Interests
Royalties are non-operating interests in mining projects that provide the right to a percentage of revenue or metals produced from the project after deducting specified costs, if any. We are entitled to payment for our royalty interest in a mining project based on a contractually specified commodity price (for example, a monthly or quarterly average spot price) for the period in which metal production occurred. As a royalty holder, we act as a passive entity in the production and operations of the mining project, and the third-party operator of the mining project is responsible for all mining activities, including subsequent marketing and delivery of all metal production to their ultimate customer. In all of our material
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royalty interest arrangements, we have concluded that we transfer control of our interest in the metal production to the operator at the point at which production occurs, and thus, the operator is our customer. We have further determined that the transfer of each unit of metal production, comprising our royalty interest, to the operator represents a separate performance obligation under the contract, and each performance obligation is satisfied at the point in time of metal production by the operator. Accordingly, we recognize revenue attributable to our royalty interests in the period in which metal production occurs at the specified commodity price per the agreement, net of any contractually allowable offsite treatment, refining, transportation and, if applicable, other contractually permitted costs.
Income Taxes
Our annual tax rate is based on income, statutory tax rates in effect and tax planning opportunities available to us in the various jurisdictions in which the Company operates. Significant judgment is required in determining the annual tax expense, current tax assets and liabilities, deferred tax assets and liabilities, and our future taxable income, both as a whole and in various tax jurisdictions, for purposes of assessing our ability to realize future benefit from our deferred tax assets. Actual income taxes could vary from these estimates due to future changes in income tax law, significant changes in the jurisdictions in which we operate or unpredicted results from the final determination of each year’s liability by taxing authorities.
We treat global intangible low-taxed income (“GILTI”) as a period cost and therefore do not record deferred tax impacts of GILTI in our consolidated financial statements. Our deferred income taxes reflect the impact of temporary differences between the reported amounts of assets and liabilities for financial reporting purposes and such amounts measured by tax laws and regulations. In evaluating the realizability of the deferred tax assets, management considers both positive and negative evidence that may exist, such as earnings history, reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies in each tax jurisdiction. A valuation allowance may be established to reduce our deferred tax assets to the amount that is considered more likely than not to be realized through the generation of future taxable income and other tax planning strategies.
Our operations may involve dealing with uncertainties and judgments in the application of complex tax regulations in multiple jurisdictions. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions and resolution of disputes arising from federal, state, and international tax audits. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. We adjust these reserves in light of changing facts and circumstances, such as the progress of a tax audit; however, due to the complexity of some of these uncertainties, the ultimate resolution could result in a payment that is materially different from our current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period which they are determined. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Forward-Looking Statements
This report and our other public communications include “forward-looking statements” within the meaning of U.S. federal securities laws. Forward-looking statements are any statements other than statements of historical fact. Forward-looking statements are not guarantees of future performance, and actual results may differ materially from these statements.
Forward-looking statements are often identified by words like “will,” “may,” “could,” “should,” “would,” “believe,” “estimate,” “expect,” “anticipate,” “plan,” “forecast,” “potential,” “intend,” “continue,” “project,” or negatives of these words or similar expressions. Forward-looking statements include, among others, the following: statements about our expected financial performance and outlook, including sale volume, revenue, expenses, tax rates, earnings or cash flow; operators’ expected operating and financial performance, including production, deliveries, mine plans, estimates of mineral resources and mineral reserves, development, cash flows and liquidity, capital requirements and capital expenditures; influence on our operators’ operations; benefits from acquisitions; receipt of metal deliveries; liquidity, capital resources, financing and stockholder returns; borrowings and repayments under our revolving credit facility; growing our portfolio of assets; the materiality of properties within our portfolio; impact of inadequately assessing new acquisitions; macroeconomic and market conditions; impacts of climate-change; diversity and inclusion efforts; returns on investments; sufficiency of contractual protections; adoption of new accounting standards; valuation allowances;
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assumptions related to fair value of equity awards; prices for gold, silver, copper, nickel and other metals; potential impairments; and tax changes.
Factors that could cause actual results to differ materially from these forward-looking statements include, among others, the following: a lower-price environment for gold, silver, copper, nickel or other metals; operating activities or financial performance of properties on which we hold stream or royalty interests, including variations between actual and forecasted performance, operators’ ability to complete projects on schedule and as planned, operators’ changes to mine plans and mineral reserves and mineral resources (including updated mineral reserve and mineral resource information), liquidity needs, mining and environmental hazards, labor disputes, distribution and supply chain disruptions, permitting and licensing issues, contractual issues involving our stream or royalty agreements, or operational disruptions; risks associated with doing business in foreign countries; increased competition for stream and royalty interests; environmental risks, included those caused by climate change; potential cyber-attacks, including ransomware; our ability to identify, finance, value and complete acquisitions; adverse economic and market conditions; impact of health epidemics and pandemics; changes in laws or regulations governing us, operators or operating properties; changes in management and key employees; and other factors described elsewhere in this report, including in Item 1A – Risk Factors. Most of these factors are beyond our ability to predict or control.
Forward-looking statements speak only as of the date on which they are made. We disclaim any obligation to update any
forward-looking statements, except as required by law. Readers are cautioned not to put undue reliance on forward-looking statements.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.