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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For The Fiscal Year Ended June 30, 1996.
Commission File No. 0-5664
ROYAL GOLD, INC.
----------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 84-0835164
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1660 Wynkoop Street
Suite 1000
Denver, Colorado 80202-1132
-------------------- ------------
(Address of Principal (Zip Code)
Executive Offices)
(303) 573-1660
--------------------------------------------------
(Registrant's Telephone Number, including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock $0.01 Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past ninety (90) days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
As of August 30, 1996, the average bid and asked price of the Company's
stock was $13.69. The aggregate market value of voting stock held by non-
affiliates was $139,681,000. As of August 30, 1996, there were 15,462,166
shares of Common Stock, $0.01 par value, outstanding.
Documents Incorporated By Reference
Portions of the Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held on December 10, 1996: Part III, Items 11, 12 and 13.
Total Number of Pages: 59 Exhibit Index - Page 53
TABLE OF CONTENTS
PAGE
Part I
Items 1.
and 2. Business and Properties 1
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of
Security Holders 21
Part II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 21
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 23
Item 8. Financial Statements and Supplementary Data 27
Part III
Item 10. Directors and Executive Officers of the
Registrant 51
Item 11. Executive Compensation 53
Item 12. Security Ownership of Certain Beneficial
Owners and Management 53
Item 13. Certain Relationships and Related
Transactions 53
Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 53
Exhibit A. The Company and Its Subsidiaries 57
Signatures 58
Cautionary "Safe Harbor" Statement Under the Private Securities Litigation
Reform Act of 1995. With the exception of historical matters, the matters
discussed in this report are forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from
projections or estimates contained herein. Such forward-looking statements
include statements regarding planned levels of exploration and other
expenditures, anticipated mine lives, timing of production and schedules for
development. Factors that could cause actual results to differ materially
include, among others, decisions and activities of Cortez regarding the
Crescent Pit, Pipeline and South Pipeline, unanticipated grade, geological
metallurgical, processing or other problems, conclusions of feasibility
studies, changes in project parameters as plans continue to be refined, the
timing of receipt of governmental permits, the failure of plant, equipment or
processes to operate in accordance with specifications or expectations,
results of current exploration activities, accidents, delayed in start-up
dates, environmental costs and risks, changes in gold prices, as well as other
factors described elsewhere in this report. Most of these factors are beyond
the Company's ability to predict or control. The Company disclaims any
obligation to update any forward-looking statement made herein. Readers are
cautioned not to put undue reliance on forward-looking statements. See
"Business and Properties - Risk Factors".
PART I
------
Items 1 and 2. BUSINESS AND PROPERTIES
GENERAL
- -------
Royal Gold, Inc., (together with its subsidiaries, "Royal" or the
"Company"), is engaged in the gold and other precious metals
business, primarily through passive and joint ownership arrange-
ments, and is also engaged in the acquisition, exploration and
development of gold properties.
The Company conducts exploration and development activity on gold
and other precious minerals properties and seeks to obtain
royalty and other carried ownership interests in these properties
through the subsequent transfer of operating interests to other
mining companies. The Company also acquires existing royalties
through the direct acquisition of such interests. Substantially
all the Company's revenues are and can be expected to be derived
from royalty interests, rather than from mining operations
conducted by the Company.
The Company's principal mineral property interest is a carried
20% net profits royalty interest in the South Pipeline property,
operated by Cortez Gold Mines. South Pipeline is located in
Crescent Valley, Nevada, and gold production commenced at that
property in September 1994 (see "South Pipeline Property" below).
In fiscal 1996, the Company generated revenues of $3,680,000 from
its royalty interest at South Pipeline. The Company is also
conducting its own development program at Long Valley, in Mono
County, California; and is engaged in exploration at Buckhorn
South, in Eureka County, Nevada, and at several other prospects
in Nevada, Utah, Wyoming and Colorado. The Company is also
evaluating opportunities in Bulgaria and several other countries,
including Australia, Chile, Mexico, Peru, Russia and other
republics of the former Soviet Union. The South Pipeline Project
is the only property in which the Company holds an interest that
is currently producing gold.
The Company is also engaged, through two wholly-owned
subsidiaries, Denver Mining Finance Company ("DMFC") and
Environmental Strategies, Inc. ("ESI"), in providing financial,
operational, and environmental consulting services to the mining
industry and to companies serving the mining industry. During
fiscal 1996, income generated from consulting services was not
material.
The Company was incorporated under the laws of the State of
Delaware on January 5, 1981. Its executive offices are located
1
at 1660 Wynkoop Street, Suite 1000, Denver, Colorado 80202. See
Exhibit 22, "The Company and Its Subsidiaries."
Developments During Fiscal 1996
- -------------------------------
The highlights of fiscal 1996 were:
(1) The Company achieved profitability for the year ended June
30, 1996. This profitability resulted from increased royalty
payments attributable to expanded and higher grade production of
mill-grade ore at the Crescent Pit on the South Pipeline
property. For fiscal 1996, the Company received 7,410 ounces of
gold, which produced revenues of $2,895,000, and cash royalties
of $150,000, from its net profits interest in the mill-grade ore
at the Crescent Pit. For the twelve months ended June 30, 1996,
the Crescent Pit produced 77,782 ounces of gold from mill-grade
production. The net profits from the Crescent Pit (that is,
revenues less direct operating costs) have already paid back to
Cortez all preproduction costs, and therefore, throughout fiscal
1996, the Company has been receiving its full 20% net profits
interest from the mill-grade ore at the Crescent Pit.
(2) Production began from the Crescent Pit heap leach operations
in August 1995. During fiscal 1996, Royal Gold received 1,139
ounces of gold, which produced revenues of $444,000, from its net
profits interest in the Crescent Pit heap leach operation.
During the quarter ended June 30, 1996, the heap leach operation
paid back to Cortez all of its preproduction costs and the
Company will hereafter receive its full 20% net profits interest
from the heap leach operation at the Crescent Pit.
(3) Probable reserves of 20.7 million tons at an average grade of
0.018 ounce per ton of gold have been established at the Long
Valley property, in Mono County, California. (See "Properties -
Long Valley" below.)
(4) The Union Pacific Agreement was amended allowing the Company
to explore portions of Union Pacific Resources Group Inc.'s
mineral estate in Colorado, Wyoming and Utah. In August 1996,
that agreement was further amended such that the Company may,
through December 31, 1999, continue to explore, with particular
emphasis on diamonds, in the State Line District of Colorado and
Wyoming, and secure the exclusive right to develop and/or farm
out diamond deposits on 50,000 acres of such ground, as may be
designated by Royal Gold. The Company also recently completed a
stream sediment sampling program which yielded indicator
minerals. These indicator minerals suggest the presence of
kimberlites, and the potential for new diamond discoveries, in
2
drainages where kimberlites were not previously known to exist.
(See "Properties - Union Pacific" below.)
(5) Options and warrants were exercised yielding receipts of
$2,896,000.
(6) During the year, the Company received $258,000 on the 0.75%
net smelter returns royalty interest* at South Pipeline. This
was higher than expected due to higher production levels at the
Crescent Pit. This royalty is capped at $375,000, of which
$112,00 was received in fiscal 1995. The remaining balance of
the capped royalty is $5,000, which is anticipated to be received
in fiscal 1997.
__________________________
* "Net smelter returns" or "NSR royalty" interest means that
the royalty holder receives a defined percentage of the gross
revenue, less a proportionate share of incidental
transportation, insurance and processing costs.
(7) The Company continued its active exploration program, both on
the Union Pacific lands and at those projects that the Company
has initiated in Nevada and Utah and the Company continued its
developmental program at Long Valley.
(8) The Company evaluated properties in Bulgaria, Russia,
Australia, Bolivia and Chile. The Company elected not to pursue
a number of these projects, and others are still being evaluated.
PROPERTIES
- ----------
Recent activities at each of the significant properties in which
the Company has an interest are described below. Reference is
made to footnotes in the financial statements for more
information on property histories.
In all instances, the Company has estimated gold-bearing material
by the use of drilling, mapping, sampling, geological
interpretation, assaying and other standard evaluation methods
generally applied by the mining industry. The Company has relied
on its joint venture partners and previous owners of certain of
its properties for the preparation of certain data and other
information. Any information prepared by others has been
reviewed by the Company and its consultants.
3
South Pipeline Property
- -----------------------
The South Pipeline property royalty interest is the Company's
most significant gold property interest. The South Pipeline
Project is operated by Cortez Gold Mines ("Cortez"), a joint
venture of Placer Domes U.S. Inc. ("PDUS") and Kennecott
Exploration (Australia) Ltd. The South Pipeline Project is
located in Lander County, Nevada, approximately 60 miles
southwest of Elko. The project involves over 4,000 acres of
unpatented mining claims (the "GAS Mining Claims"), which Cortez
leases from ECM, Inc. ("ECM").
The Company currently holds a fully-carried royalty interest in
the South Pipeline Project. (That is, the Company is never
obliged to advance any of the costs of exploration, development
or production at South Pipeline.) The Company, at its annual
election, can either receive a 20% net profits royalty interest
or a sliding scale 2.5% to 5.5% NSR royalty interest in all
production from the GAS Mining Claims. Under either royalty
interest, the Company may elect to take its share of production
in-kind. In November 1995, the Company made its annual election
to receive its production in-kind.
Background
- ----------
As has been described extensively in prior years, the Company has
been involved with this property since 1987. The Company, as the
original operator of a joint venture with Cortez, conducted the
initial exploration work at South Pipeline, which was then
referred to as "Crescent Valley". Reverse circulation drilling
programs conducted by the Company in calendar 1988, 1989 and 1990
resulted in identification of one sediment-hosted, "Carlin-type",
disseminated gold deposit and identification of other gold
anomalies.
In 1991, due to liquidity problems then being experienced, the
Company determined to sell its interest in the property. By the
end of 1991, the Company held only a nominal interest in the
South Pipeline property. In September 1992, however, the Company
recovered a 20% net profits interest on the South Pipeline
property following settlement of litigation brought by the
Company against Cortez and PDUS. Under the Agreement, Cortez, as
operator and manager, committed to an exploration and development
work program. After payback, as defined in the Agreement, the
Company will receive a 20% net profits royalty or, at its
election beginning with production and annually thereafter, an
NSR royalty according to a schedule tied to indexed gold prices.
The NSR royalty ranges from 2.5% for an indexed price of $350 per
ounce to 5.5% for an indexed price in excess of $500 per ounce.
4
Under either royalty arrangement, the Company may elect to take
its royalty "in-kind."
As part of the Agreement, Cortez purchased units of Royal Gold
securities for $800,000. The units consisted of 500,000 shares
of the Company's common stock, and warrants to purchase 600,000
additional shares of the Company's common stock at an average
price of $2.50 per share. During fiscal 1996, all of the Cortez
warrants were exercised and the Company received $1,500,000.
If Cortez does not elect to put any deposit containing at least
300,000 ounces of gold into production within two years of its
identification, then the Company may elect to put that deposit
into production, thereby securing 100% of the working interest
therein, subject to granting a 20% net profits interest royalty
to Cortez identical to the one described above. Royal Gold would
then also be entitled to use, under a normal tolling arrangement
and as available, the Cortez milling facilities in the vicinity,
including any to be built for the Pipeline project.
Finally, Cortez entered into a five year standstill agreement
with respect to further acquisition of shares of the Company or
other actions regarding efforts to acquire or control the
Company. During the standstill period, Cortez may not sell any
of the acquired shares except pursuant to Rule 144 and certain
other specified transactions.
The Company also receives $150,000 per year in advance minimum
royalties from Cortez. All such royalties, together with
allocable capital, are recoupable by Cortez out of production
royalties otherwise payable to the Company. Recoupment has been
achieved on both mining units at the Crescent Pit. The Company's
royalty will be subject to recoupment for each new mining unit
put into production.
Development
- -----------
Since November 1992, Cortez has conducted an aggressive program
of exploration and development drilling at South Pipeline, and
has spent well over $15 million through June 30, 1996.
On December 31, 1995, Cortez announced that the mineral deposit
at South Pipeline was estimated to contain 91.8 million tons,
with an average grade of 0.039 ounces of gold per ton. Cortez
also announced that it will spend $1.7 million on exploration
drilling at South Pipeline during calendar year 1996.
In June 1994, Cortez began open pit mining at the Crescent Pit, a
near-surface portion of the South Pipeline deposit, and on
5
September 20, 1994, Cortez announced that it had commenced the
production of gold from the Crescent Pit. Initially, Cortez
combined the Crescent Pit ore with ore from another mine (in
which the Company has no interest), and processed all such ore at
the Cortez mill, a 2,000 ton per day facility that is located a
few miles east of the Crescent Pit. In February 1996, however,
Cortez notified the Company that it would stop commingling ores
at the Cortez mill and that it would mill Crescent Pit ore
exclusively, at least through the end of calendar year 1996. At
June 30, 1996, production from the Crescent Pit was utilizing
100% of the capacity of the Cortez mill.
In addition to the South Pipeline gold deposits that have been
defined to date, other important gold intercepts have been made
on South Pipeline property, which suggests that additional
deposits may exist on the property. Limited exploration was
conducted during fiscal 1996, as Cortez focused on developing a
plan to mine the South Pipeline reserve.
In September 1996, Cortez filed its "1996 Amendment to the
Pipeline Plan of Operations for the South Pipeline Project" with
the Bureau of Land Management. (Pipeline is a neighboring
property to the north that is operated by Cortez. Royal Gold has
no interest in the Pipeline deposit.) In this amendment, Cortez
states that the pre-stripping of the open pit mine at South
Pipeline is expected to take about 18 months and will begin at
the end of the third year of mining activity at Pipeline. The
mine life of Pipeline is estimated to be five plus years after
commissioning of a mill with throughput of 10,000 tons per day.
Cortez also stated that South Pipeline ore will be processed
after mining of the Pipeline deposit has been completed. The
majority of the South Pipeline Project ore will be processed in
the Pipeline processing facilities, extending the Pipeline/South
Pipeline Project life by an additional eight years. Timing of
production at the South Pipeline deposit remains subject to
permitting and decisions of the operator. Royal Gold is
evaluating the information contained in the Cortez' announcement
and will continue to monitor the situation.
Crescent Pit Operations
- -----------------------
The Crescent Pit operation, which is projected to encompass some
320 acres within the 4,000 acre claim block of the South Pipeline
Project, was planned to recover some 217,000 ounces of mill-grade
gold over a four-year period. In July 1995, production commenced
at the Crescent Pit heap leach facility and it was anticipated
that 34,000 ounces of gold would be recovered from the heap leach
material over a five year period. It now appears that gold
production from the Crescent Pit may exceed initial expectations,
6
for both mill-grade and heap leach material.
Crescent Pit Production
- -----------------------
Set forth below is a chart showing the production by quarter from
the Crescent Pit mill-grade ore during fiscal 1996:
Average
Tons Grade Recoveries Recovered
(millions) (oz Au/ton) (percentage) ounces
Quarter ended: -------- --------- ---------- ---------
9/30/95 93.8 .158 84.6 12,545
12/31/95 83.7 .160 83.4 11,163
3/31/96 106.0 .218 85.7 19,813
6/30/96 157.2 .238 91.4 34,261
Fiscal 1996 440.7 .201 87.7 77,782
Additionally, 19,793 ounces of gold were produced from the
Crescent Pit heap leach material during fiscal 1996. (These
production amounts represent 100% of the production at the
Crescent Pit. The Company holds a 20% net profits interest in
this property.)
Reserves and Other Mineralization
- ---------------------------------
Set forth below are charts showing the reserves and gold deposits
that have been defined at the South Pipeline property:
7
Proven and Probable Reserves (1)
December 31, 1995 adjusted for Crescent Pit Production
Average
Tons Grade Contained
(millions) (oz Au/ton) Oz Au (2)
-------- --------- --------
South Pipeline Property
Crescent Pit:
Mill Grade Ore (3) 1.58 0.118 186,000
Heap Leach Ore (3) 0.87 0.028 24,000
South Pipeline Deposit:
Mill Grade Ore (3) 22.72 0.088 1,999,000
Heap Leach Ore (3) 25.93 0.019 493,000
- ----------------------
(1) "Reserve" is that part of a mineral deposit which could be
economically and legally extracted or produced at the time of the
reserve determination.
"Proven (Measured) Reserves" are reserves for which (a)
quantity is computed from dimensions revealed in outcrops,
trenches, workings or drill holes and the grade is computed from
the results of detailed sampling, and (b) the sites for
inspection, sampling and measurement are spaced so closely and
the geologic character is so well defined that the size, shape,
depth and mineral content of the reserves are well-established.
"Probable (Indicated) Reserves" are reserves for which
the quantity and grade are computed from information similar to
that used for proven (measured) reserves, but the sites for
inspection, sampling, and measurement are farther apart or are
otherwise less adequately spaced. The degree of assurance of
probable (indicated) reserves, although lower than that for
proven (measured) reserves, is high enough to assume geological
continuity between points of observation.
(2) Contained ounces shown are before an allowance for dilution
of ore in the mining process. The assumed recovery rates are 84%
for Crescent Pit mill-grade ore, 86% for South Pipeline mill-
grade ore, and 50% for heap leach material. During fiscal 1996,
Cortez actually recovered 87.7% of the assayed head grade of the
Crescent Pit mill-grade ore, and 64% of the assayed head grade of
the Crescent Pit heap leach material.
(3) Amounts shown represent 100% of the reserves. The Company
holds a 20% net profits interest in this property.
8
Gold Deposits/Mineralization (1)
December 31, 1995
Average
Tons Grade
(millions) (oz Au/ton)
-------- ---------
South Pipeline Project 39.24 0.021
Deep Zone (2)(3) 5.96 0.126
- -------------------------
(1) Gold mineralization has not been included in the proven and
probable ore reserve estimates because even though drilling,
trenching and/or underground work indicate a sufficient quantity
and grade to warrant further exploration or development
expenditures, these deposits do not qualify as commercially
mineable ore bodies until further drilling and metallurgical work
are completed, and until other economic and technical feasibility
factors based upon such work are resolved.
(2) Amounts shown represent 100% of the deposits. The Company
holds a 20% net profits interest in this property.
(3) The Deep Zone is that portion of the South Pipeline deposit,
located below the bottom of the currently "optimized" South
Pipeline Pit, which is potentially mineable by underground mining
methods. Cortez is currently evaluating the Deep Zone.
Long Valley
- -----------
The Long Valley project consists of 136 unpatented mining claims
located 45 miles north of Bishop, California, in Mono County.
The Company has been involved with this property since 1989, when
it entered into a joint venture with Standard Industrial
Minerals, Inc. ("Standard"). Standard owns 105 of the claims
that comprise the Long Valley project, and operates a kaolin mine
that is adjacent to the property. The Company located the
additional 31 claims.
Under the joint venture agreement, the Company has an option,
exercisable through December 31, 1997, to acquire the entirety of
Standard's interest in Long Valley for $1,000,000. During the
term of the option, the Company is obliged to make annual
payments to Standard, totalling $125,000 over four years, with
$100,000 of such payments being creditable against the option
exercise payment. The Company has no specific work commitment.
During 1994, the Company completed 18 reverse circulation holes,
aggregating some 16,000 feet. Based on the results of such
drilling, and data generated by predecessors in interest, Royal
9
Gold determined the existence of two new areas of gold
mineralization (the "Hilton Creek Zone" and the "Southeast
Zone"), separated by about 2,000 feet, and estimated that such
zones contain a total of 49,640,000 tons of gold mineralization,
with an average grade of 0.018 ounces of gold per ton.
Royal Gold has continued to explore at Long Valley since 1994,
and, through June 30, 1996, has completed more than 200 reverse-
circulation holes, aggregating more than 70,000 feet of drilling.
The program has confirmed the existence of continuous
mineralization between the Hilton Creek and Southeast Zones and
has discovered additional mineralization to the north and to the
south of the Hilton Creek Zone.
Based on the results of the drilling, the Company retained
outside consultants to conduct a reserve study. Based on this
study the Company has determined that Long Valley contains
reserves, suitable for open pit mining, as set forth below.
Based on these reserves the Company has designated this project
as a development property as of July 1, 1995. All costs incurred
in fiscal 1996 have been capitalized.
Reserves and Other Mineralization
- ---------------------------------
Set forth below are charts showing the reserves and gold deposits
that have been defined at Long Valley:
10
Probable Reserves (1)(3)
June 30, 1996
Average
Tons Grade Contained
(millions) (oz Au/ton) Oz Au (2)
-------- --------- --------
Long Valley 20.7 0.018 373,000
- --------------------
(1) "Reserve" is that part of a mineral deposit which could be
economically and legally extracted or produced at the time of the
reserve determination.
"Proven (Measured) Reserves" are reserves for which (a)
quantity is computed from dimensions revealed in outcrops,
trenches, workings or drill holes and the grade is computed from
the results of detailed sampling, and (b) the sites for
inspection, sampling and measurement are spaced so closely and
the geologic character is so well defined that the size, shape,
depth and mineral content of the reserves are well-established.
"Probable (Indicated) Reserves" are reserves for which
the quantity and grade are computed from information similar to
that used for proven (measured) reserves, but the sites for
inspection, sampling, and measurement are farther apart or are
otherwise less adequately spaced. The degree of assurance of
probable (indicated) reserves, although lower than that for
proven (measured) reserves, is high enough to assume geological
continuity between points of observation.
(2) Contained ounces shown are before an allowance for dilution
of ore in the mining process. The assumed recovery rate for heap
leach material is 70%.
(3) These reserves were computed using a gold price of $350 per
ounce and a cut-off grade of 0.018 ounces per ton of gold.
11
Gold Deposits/Mineralization (1)
June 30, 1996
Average
Tons Grade
(millions) (oz Au/ton)
-------- ---------
Long Valley 47.4 0.018
- ------------------
(1) Gold mineralization has not been included in the proven and
probable ore reserve estimates because even though drilling,
trenching and/or underground work indicate a sufficient quantity
and grade to warrant further exploration or development
expenditures, these deposits do not qualify as commercially
mineable ore bodies until further drilling and metallurgical work
are completed, and until other economic and technical feasibility
factors based upon such work are resolved.
Union Pacific Exploration Project
- ---------------------------------
Under its agreement with Union Pacific Resources Group, Inc.
("UPR"), originally executed in May 1994, the Company conducted
reconnaissance on some 7.5 million acres of UPR land in Utah,
Wyoming and Colorado, including the State Line District of
Wyoming and Colorado. The Company conducted preliminary
exploration throughout UPR's holdings and then designated 50,000
acres for more extensive exploration.
During fiscal 1996, Royal Gold and UPR amended their agreement.
In December 1995, the Company committed to spend $75,000 on
specific exploration by August 19, 1996, at which time it was
obligated to elect to continue exploration through the end of
calendar year 1996 or else terminate the agreement. In August
1996, the Company elected to continue the program in the State
Line District of Colorado and Wyoming, with particular emphasis
on diamond exploration, and the Company committed to spend an
additional $50,000 through the end of calendar 1996. Royal Gold
also agreed to expand its prior obligation by $150,000 if it
elects to enter into a further extension of its exploration
program, through calendar year 1998. The entire term of the
agreement remains unchanged, expiring on December 31, 1999, with
aggregate exploration commitments totalling $2.375 million.
Royal Gold may also elect to terminate the agreement after
spending the additional $50,000 in calendar year 1996, or after
spending at least $375,000 in either of calendar years 1997 or
1998.
12
The Company has already identified ten large prospect areas in
the State Line District where it conducted geochemical sampling
surveys. Royal Gold recently completed this stream sediment
sampling program which yielded indicator minerals. These
indicator minerals suggest the presence of kimberlites, and the
potential for diamond discoveries, in drainages where kimberlites
were not previously known to exist. Royal Gold's stream sediment
sampling program involved taking samples of approximately 90
pounds each of material passing through a 3mm screen. Samples
were taken on approximately one kilometer centers. Additional
sampling is planned for fiscal 1997. Exploring for diamonds is a
long and complicated process which is both expensive and time
consuming. At this early stage of exploration, there is no
assurance that kimberlites or commercial quantities of diamonds
will be found.
If the Company identifies attractive deposits on the UPR lands,
it has the opportunity, under the terms of agreements that have
already been negotiated with UPR, to assign further exploration
and development rights to third parties; to develop such deposits
in collaboration with UPR; or to develop such deposits for Royal
Gold's own account. In all circumstances where UPR does not
itself elect to become operator, UPR will retain a royalty
interest. Under certain other circumstances, UPR may elect both
a minority working interest plus a royalty interest.
The extent of any such UPR royalty will depend on market factors,
including, among others, the desirability to a third party of the
particular deposit that may be discovered on the UPR property.
Buckhorn South
- --------------
The Buckhorn South project is located in Eureka County, Nevada,
approximately 50 miles southwest of Elko. The property consists
of 265 unpatented mining claims.
Of the 265 claims that comprise Buckhorn South, the Company
leases 131 such claims from Ronald and Arlene Damele, et al., and
the Company staked the balance of the project area. Over the
next two years, the Company is obliged to pay the lessor $360,000
in advance minimum royalties. The leased claims are burdened by
cumulative royalties equal to a 4% NSR; the remaining claims are
subject to a 1% NSR.
A predecessor in interest at the property completed some 10,400
feet of drilling, and on the basis of such work and other
exploration had, by 1984, estimated that the "Zeke" deposit
contains two million tons of mineralization with an average grade
of 0.056 ounces of gold per ton.
13
During 1994, the Company conducted geophysical surveys and
drilled nine holes aggregating 6,800 feet. Through its work, the
Company identified new areas of gold mineralization about one
mile south of the Zeke deposit, and also identified structurally
complex areas that may contain significant alteration and
sulfides.
During 1995, the Company drilled 24 reverse-circulation holes,
totalling 13,825 feet. As anticipated, gold mineralization was
discovered, and several of the drill holes contained intervals
exceeding 0.01 ounce per ton of gold. Additional drilling is
planned for fiscal 1997.
Ferber
- ------
The Ferber project is located in Elko County, Nevada,
approximately 80 miles southeast of Elko, and consists of 98
unpatented mining claims. Royal Gold leases 51 of the claims
from Donald Jennings, and Royal Gold located the other 47 claims.
The Jennings lease involves advance minimum royalties of $10,000
per year, expiring in February 1998, and a royalty burden of 2%
NSR. The Company also has work commitments of $100,000 per year
in 1999 and 2000, and $150,000 per year through 2003. In April
1995, five reverse circulation holes were completed totalling
3,020 feet. These holes were drilled to test for mineralization
along the southwestern margin of an intrusive where copper and
gold are known to occur in skarns. Three of the holes
encountered strongly anomalous gold and copper in both the skarn
and the intrusive. The presence of such anomalous intervals in
the intrusive opens large areas of the district for further
exploration. Additional drilling was conducted in October 1995.
Other Exploration Properties
- ----------------------------
During fiscal 1996, the Company acquired control of five
additional properties in Nevada and Utah. The Company will
continue to acquire and explore other properties, to the extent
that the Company believes they have the potential to host major
gold deposits. It can be anticipated, because of the nature of
the business, that exploration on many of these properties will
prove unsuccessful and that the Company will terminate its
interest in such properties. (For example, in July 1996, the
Company terminated its interest in two properties located in
Eureka County, Nevada - the Bob Creek property and the Tub
property.) As significant results are generated at any
exploration property, the Company will re-evaluate the property,
and may substantially increase or decrease the level of
expenditures on any particular property.
14
Sales Contracts
- ---------------
The Company sold 1,500 ounces of gold bullion in fiscal 1996,
utilizing one metal trader during the period. The Company
maintains trading relationships with a number of metal traders.
The Company is currently receiving its net profits interest
royalty in-kind. This gold is being held with a view towards
sale at a higher gold price.
Competition
- -----------
There is aggressive competition within the minerals industry to
discover and acquire properties considered to have commercial
potential. The Company competes for the opportunity to
participate in promising exploration projects with other
entities, many of which have greater resources than the Company.
In addition, the Company competes with others in efforts to
obtain financing to explore and develop mineral properties, and
it also competes with others in efforts to purchase gold royalty
interests.
Company Personnel
- -----------------
At August 31, 1996, the Company had ten full-time employees
located in Denver, Colorado, and one full-time employee located
in Elko, Nevada. The Company's employees are not subject to a
union labor contract or collective bargaining agreement.
Consulting services, relating primarily to geologic and
geophysical interpretations, and advice with respect to
metallurgical, engineering, legal and such other technical
matters as may be deemed useful in the operation of the Company's
business, are provided by independent consultants and
contractors.
Regulation
- ----------
The Company's activities in the United States are subject to
various federal, state and local laws and regulations governing
prospecting, development, production, labor standards,
occupational health, mine safety, control of toxic substances,
other matters involving environmental protection, and taxation.
The environmental protection laws address, among other things,
the maintenance of air and water quality standards, the
preservation of threatened and endangered species of wildlife and
vegetation, the preservation of certain archaeological sites,
reclamation, and limitations on the generation, transportation,
storage and disposal of solid and hazardous wastes. There can be
no assurances that all the required permits and governmental
15
approvals can be obtained on a timely basis and maintained as
required. In 1992, the Company received notice of a response
action initiated by the U.S. Forest Service with respect to
Goldstripe, but based on information currently available believes
that no further action by the Company is likely to be required.
Therefore, the Company believes that the response action will not
result in any material adverse effect on the Company. See "LEGAL
PROCEEDINGS." The Company believes that the property and
operations in which it retains interests are currently in
material compliance with all applicable laws and regulations.
Foreign Operations
- ------------------
The Company owns a 50% interest in Greek American Exploration
Ltd. ("GRAMEX"), a Bulgarian private limited company that has
entered into an agreement with the Bulgarian Committee of Geology
and Mineral Resources to conduct geological research and
exploration over 700 square kilometers in the Krumovgrad and
Ivaylovgrad areas of Bulgaria.
This cancelable agreement is for an initial term of two years,
requiring expenditures of $100,000 per year by GRAMEX. The
Company has funded its portion of the initial phase of the
commitment and plans a modest exploration program in fiscal 1997.
The agreement may be extended for an additional two year period,
expiring 1999. The Company is obligated to fund 50% of GRAMEX'
expenditures.
RISK FACTORS
- ------------
Risks of Passive Ownership
- --------------------------
At present, the Company's principal asset is its interest in the
South Pipeline property. The Company's success is dependent on
the extent to which South Pipeline proves to be successful and on
the extent to which Royal Gold is able to acquire or create other
lucrative royalty interests.
The holder of a royalty interest typically has no executive
authority regarding development or operation of a mineral
property. Therefore, unless the Company is able to secure and
enforce certain extraordinary rights, it can be expected that the
Company will not be in control of basic decisions regarding
development and operation of the properties in which the Company
may have an interest.
Thus, the Company's strategy of having others operate properties
in which it retains a royalty or other passive interest puts the
Company generally at risk to the decisions of others regarding
16
all basic operating matters, including permitting, feasibility
analysis, mine design and operation, and processing, plant and
equipment matters, among others. While the Company attempts to
obtain contractual rights that will permit the Company to protect
its position, there can be no assurance that such rights will be
sufficient or that the Company's efforts will be successful in
achieving timely or favorable results.
Risks Inherent in the Mining Industry
- -------------------------------------
Mineral exploration and development is highly speculative and
capital intensive. Most exploration efforts are not successful,
in that they do not result in the discovery of mineralization of
sufficient quantity or quality to be profitably mined. The
operations of the Company are also indirectly subject to all of
the hazards and risks normally incident to developing and
operating mining properties. These risks include insufficient
ore reserves, fluctuations in production costs that may make
mining of reserves uneconomic; significant environmental and
other regulatory restrictions; labor disputes; geological
problems; failure of pit walls or dams; force majeure events; and
the risk of injury to persons, property or the environment.
Uncertainty of Reserves and Mineralization Estimates
- ----------------------------------------------------
There are numerous uncertainties inherent in estimating proven
and probable reserves and mineralization, including many factors
beyond the control of the Company. The estimation of reserves
and mineralization is a subjective process and the accuracy of
any such estimates is a function of the quality of available data
and of engineering and geological interpretation and judgment.
Results of drilling, metallurgical testing and production and the
evaluation of mine plans subsequent to the date of any estimate
may justify revision of such estimates. No assurances can be
given that the volume and grade of reserves recovered and rates
of production will not be less than anticipated. Assumptions
about prices are subject to greater uncertainty and gold prices
have fluctuated widely in the past. Declines in the market price
of gold or other precious metals also may render reserves or
mineralization containing relatively lower grades of ore
uneconomic to exploit. Changes in operating and capital costs
and other factors including, but not limited to, short-term
operating factors such as the need for sequential development of
ore bodies and the processing of new or different ore grades, may
materially and adversely affect reserves.
17
Proposed Federal Legislation
- ----------------------------
The U.S. Congress is currently considering a proposed major
revision of the General Mining Law, which governs the creation of
mining claims and related activities on federal public lands in
the United States. Each of the Senate and the House of
Representatives has passed a separate bill for mining law
revision, and it is possible that a new law could be enacted.
The Company expects that when the new law is effective, it will
impose a royalty upon production of minerals from federal lands
and will contain new requirements for mined land reclamation, and
similar environmental control and reclamation measures. It
remains unclear to what extent any such new legislation may
affect existing mining claims or operations. The effect of any
such revision of the General Mining Law on the Company's
operations in the United States cannot be determined conclusively
until such revision is enacted; however, such legislation could
materially increase costs at Long Valley and at a number of the
Company's other exploration properties in Nevada and Utah, each
of which is located entirely on federal lands, and such revision
could also impair the Company's ability to develop, in the
future, any mineral prospects that are located on unpatented
mining claims.
Fluctuations in the Market Price of Minerals
- --------------------------------------------
The profitability of gold mining operations (and thus the value
of the Company's royalty interests and exploration properties) is
directly related to the market price of gold. The market price
of gold fluctuates widely and is affected by numerous factors
beyond the control of any mining company. These factors include
expectations with respect to the rate of inflation, the exchange
rates of the dollar and other currencies, interest rates, global
or regional political, economic or banking crises, and a number
of other factors. If the market price of gold should drop
dramatically, the value of the Company's royalty interests and
exploration properties could also drop dramatically, and the
Company might not be able to recover its investment in those
interests or properties. The selection of a property for
exploration or development, the determination to construct a mine
and place it into production, and the dedication of funds
necessary to achieve such purposes are decisions that must be
made long before the first revenues from production will be
received. Price fluctuations between the time that such
decisions are made and the commencement of production can
drastically affect the economics of a mine.
18
The volatility in gold prices is illustrated by the following
table, which sets forth, for the periods indicated, the high and
low prices in U.S. dollars per ounce.
Year Gold Price Per Ounce($)
---- ----------------------
High Low
---- ---
1991 403 350
1992 359 331
1993 406 327
1994 396 370
1995 393 372
January-June, 1996 416 382
At August 30, 1996, the gold price was $386.45 per ounce. At
present, the Company has no hedging programs in place. At June
30, 1996, the Company held 3,128 ounces of gold bullion in
inventory. Additionally, at June 30, 1996, the Company had a
royalty receivable of 4,199 ounces. The Company would consider
hedging programs in the event certain production levels are
obtained and maintained, and market conditions justify the
economic use of hedging programs.
Environmental Risks
- -------------------
Mining is subject to potential risks and liabilities associated
with pollution of the environment and the disposal of waste
products occurring as a result of mineral exploration and
production. Insurance against environmental risks (including
potential liability for pollution or other hazards as a result of
the disposal of waste products occurring from exploration and
production) is not generally available to the Company (or to
other companies within the gold industry) at a reasonable price.
To the extent that the Company becomes subject to environmental
liabilities, the satisfaction of any such liabilities would
reduce funds otherwise available to the Company and could have a
material adverse effect on the Company. Laws and regulations
intended to ensure the protection of the environment are
constantly changing, and are generally becoming more restrictive.
Title to Properties
- -------------------
The validity of unpatented mining claims, which constitute a
significant portion of the Company's property holdings in the
United States, is often uncertain, and such validity is always
subject to contest. Unpatented mining claims are unique property
interests and are generally considered subject to greater title
risk than patented mining claims, or real property interests that
are owned in fee simple. The Company has not yet filed a patent
19
application for any of its properties that are located on federal
public lands in the United States and, under proposed legislation
to change the General Mining Law, patents may be hard to obtain.
Although the Company has attempted to acquire satisfactory title
to its undeveloped properties, the Company does not generally
obtain title opinions until financing is sought to develop a
property, with the attendant risk that title to some properties,
particularly title to undeveloped properties, may be defective.
Foreign Operations
- ------------------
The Company's foreign activities are subject to the risks
normally associated with conducting business in foreign
countries, including exchange controls and currency fluctuations,
limitations on repatriation of earnings, foreign taxation, laws
or policies of particular countries, labor practices and
disputes, and uncertain political and economic environments, as
well as risks of war and civil disturbances, or other risks that
could cause exploration or development difficulties or stoppages,
restrict the movement of funds or result in the deprivation or
loss of contract rights or the taking of property by
nationalization or expropriation without fair compensation.
Foreign operations could also be adversely impacted by laws and
policies of the United States affecting foreign trade, investment
and taxation. The Company currently has exploration projects in
Bulgaria, and is actively seeking other gold exploration and gold
royalty acquisition or development opportunities in several
countries, including Australia, Chile, Mexico, Peru, Russia and
other republics of the former Soviet Union.
Item 3. LEGAL PROCEEDINGS
Goldstripe Project
- ------------------
In May 1996, the Forest Service reconfirmed to the Company that
its reclamation activities were substantially completed at the
Goldstripe property, located in Plumas County California, and
that the Forest Service believed that such activities should
satisfy all outstanding permit requirements for reclamation,
except for ongoing post-reclamation monitoring of water quality.
However, it is possible that additional reclamation or water
quality monitoring could be required, and that any such
requirement could result in additional cost to the Company.
Following cessation of the Company's operations at Goldstripe,
and in connection with efforts to obtain funding for reclamation,
on August 5, 1992, the U.S. Forest Service notified the Company
that it had determined to initiate a response action at the
20
Goldstripe site, under the Comprehensive Environmental Response,
Compensation, and Liability Act ("CERCLA"), in order to assess
the threat of a possible release of cyanide from a processed
material residue pile. To date, the only action undertaken by the
Forest Service in connection with the response action has been to
establish four monitoring wells at the site, at an estimated cost
of $27,000. Although not formally related to the response action
notice, on October 5, 1992, the Company released $341,000 in cash
security for a reclamation bond to fund reclamation to be
performed at Goldstripe by the Forest Service. The Company
believes, based on oral communications with the Forest Service,
that approximately $325,000 of the $341,000 has been spent to
date. The Company also believes, based on such communications,
and the current status of reclamation at the site, that no
additional "response action" or other remediation is likely to be
undertaken by the Forest Service under CERCLA or otherwise.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the quarter ended June 30, 1996. Annual meeting results will be
described in Item 4 to the Company's report that will be filed on
Form 10-Q, for the quarter ended December 31, 1996.
PART II
-------
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock of the Company is traded in the over the counter
market by the National Association of Securities Dealers under
the symbol "RGLD." The following table shows the high and low
closing sales prices for the Common Stock for each quarter since
June 30, 1994.
21
Sales Prices
------------------
High Low
Fiscal Year Closing Closing
- ----------- ------- -------
1995:
First Quarter (July, Aug., Sept. - 1994) $ 9 1/8 $ 7 1/4
Second Quarter (Oct., Nov., Dec. - 1994) $ 8 1/4 $ 7 1/2
Third Quarter (Jan., Feb., March - 1995) $ 8 1/4 $ 5 5/8
Fourth Quarter (April, May, June - 1995) $ 8 1/4 $ 6 1/2
1996:
First Quarter (July, Aug., Sept. - 1995) $ 9 3/8 $ 7 7/8
Second Quarter (Oct., Nov., Dec. - 1995) $ 8 1/2 $ 7 1/2
Third Quarter (Jan., Feb., March - 1996) $ 11 $ 8
Fourth Quarter (April, May, June - 1996) $ 15 5/8 $11
As of August 30, 1996, there were approximately 3,000
shareholders of record of the Company's common stock.
Dividends
- ---------
The Company has never paid any cash dividends on its Common Stock
and does not have any current plans to pay such dividends.
Item 6. SELECTED FINANCIAL DATA
For the Year Ended June 30,
----------------------------------------------
1996 1995 1994 1993 1992
Selected Statement of ---- ---- ---- ---- ----
Operations Data (Amounts in thousands, except per share data)
----------------------------------------------
Royalty income $ 3,680 $ 470 $ 153 $ 150 $ -
Exploration expense 1,434 1,485 686 151 111
General and administrative
expense 1,204 1,015 753 582 682
Net income (loss) 589 (2,025) (1,452) (618) (638)
Net income (loss)
per share $ .04 $ (.14) $ (.11) $ (.06) $ (.07)
As of June 30,
-------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Selected Balance Sheet Data (Amounts in thousands)
---------------------------------------------
Total assets $ 14,063 $10,273 $ 8,183 $ 2,727 $1,877
Working capital (deficit) 11,130 8,723 6,884 1,229 (272)
Long-term obligations 111 117 131 193 453
22
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
At June 30, 1996, the Company had current assets of $11,659,000
compared to current liabilities of $530,000 for a current ratio
of 22 to 1. This compares to current assets of $8,941,000 and
current liabilities of $218,000, at June 30, 1995, resulting in a
current ratio of 41 to 1. The Company's current assets include
$5,015,000 of marketable securities that consist of U.S. treasury
securities with maturities of 15 months or less. The Company's
initial cost of these marketable securities was $5,046,406.
During fiscal 1996, liquidity needs were met from: (i) $3,680,000
in revenues from production at the Crescent Pit (of which
$2,843,000 is maintained as gold inventory and royalty
receivables in gold), (ii) the Company's available cash resources
and interest income of $442,000, and (iii) cash receipts from the
exercise of options and warrants of $2,896,000. The Company's
operating activities utilized approximately $1,711,000 of cash
during the fiscal year ended June 30, 1996.
During the year, the Company spent $1,301,000 on its capitalized
properties related to the Long Valley property.
The only material commitments of the Company that cannot be
terminated at the sole discretion of the Company are (i) the
Union Pacific Agreement which requires approximately $75,000 to
be spent on exploration during the period July 1, 1996 through
December 31, 1996; (ii) employment agreements with four officers,
calling for minimum payments of approximately $323,000 through
January 1996; and (iii) office lease payments of $427,235 through
the lease period ending October 1999.
The Union Pacific Agreement provides that the Company can extend
the agreement for three additional terms of 12 months each upon
making additional exploration commitments of $375,000, $375,000
and $1,000,000, respectively. (If the Company exercises all of
its rights to extend, total exploration expenditures under the
agreement are estimated to be $2,375,000 over the full 55-month
term, which commenced in 1994.)
The Company anticipates total expenditures for fiscal 1997 for
general and administrative expenses to be approximately
$1,200,000 and expenditures for exploration and property holding
costs to be approximately $1,225,000 (including amounts spent
under the Union Pacific Agreement). Development costs at Long
Valley are anticipated to be $1,000,000. Exploration and holding
23
cost expenditures include $125,000 for Buckhorn South, $75,000
for the Union Pacific project, $775,000 for the five new
properties acquired in fiscal 1996, and $250,000 for generative
exploration. These amounts could increase or decrease
significantly, at any time during the year, based on exploration
results and decisions about releasing or acquiring additional
properties, among other factors.
The Company will continue to explore its remaining properties and
intends to acquire new projects, all with a view to enhancing the
value of such properties prior to possible farm out to major
mining company partners.
The Company's current financial resources and sources of income
should be adequate to cover the Company's general and
administrative costs for at least the next fiscal year.
The Company anticipates utilizing its $750,000 net deferred tax
asset based on the operator's current projection of production at
the Crescent Pit. This net deferred tax asset, which includes a
valuation allowance of $7,174,000, is evaluated quarterly and could
increase based on the production of reserves at South Pipeline, Long
Valley or other new discoveries.
RESULTS OF OPERATIONS
- ---------------------
Fiscal Year Ended June 30, 1996 Compared with Fiscal Year Ended June 30, 1995
- -----------------------------------------------------------------------------
For the year ended June 30, 1996, the Company recorded net income
of $589,000, or $.04 per share, as compared to a net loss of
$2,025,000, or $.14 per share, for the year ended June 30, 1995.
The net income for the current period resulted mainly from the
increased royalty revenue related to the Company's interest in
the Crescent Pit.
The Company received net profits interest royalty income from the
Crescent Pit of $3,045,000 relating to mill-grade material,
$444,000 relating to heap leach material, and $258,000 relating
to the Company's capped royalty. This was reduced by a
unrealized loss on gold inventory of $77,000. Based on the
current rate of production, the Crescent Pit mill-grade material
will be exhausted by the end of fiscal 1997. It is anticipated
that the heap leach material will be mined through fiscal 1998.
Costs of operations increased over the prior year, which related
to the payment of Nevada Net Proceeds Tax associated with the
increased production.
24
Consulting revenues and costs of consulting revenues decreased
over the prior year primarily because of the termination of one
consulting arrangement.
General and administrative expenses of $1,204,000, for the year
ended June 30, 1996, increased from those of $1,015,000 for the
year ended June 30, 1995, as a result of increased employee
compensation and office expenses. General and administrative
expenses consist primarily of employee compensation and benefits,
office lease expense, office equipment expenses, travel and
communication costs.
Exploration costs remained flat at $1,485,000 in fiscal 1995 and
$1,434,000 in fiscal 1996 as the Company continued its active
exploration program.
Lease maintenance and holding costs increased from $190,000 in
fiscal 1995 to $229,000 in fiscal 1996 due to scheduled increased
holding costs at Buckhorn South.
Interest and other income was $442,000 in fiscal 1996, up from
$386,000 in fiscal 1995, due primarily to increased funds
available for investing. At June 30, 1996, the Company had an
unrealized loss of $37,000 on its U.S. treasury securities
portfolio versus a gain of $76,000 in fiscal 1995 due to the
increase in short term interest rates during the year.
Depreciation and amortization increased from $102,000 for fiscal
1995 to $229,000 for fiscal 1996, primarily due to the depletion
associated with the Company's capped net smelter return royalty
at South Pipeline.
Fiscal Year Ended June 30, 1995 Compared with Fiscal Year Ended June 30, 1994
- -----------------------------------------------------------------------------
For the year ended June 30, 1995, the Company recorded a net loss
of $2,025,000, or $.14 per share, as compared to a net loss of
$1,452,000, or $.11 per share, for the year ended June 30, 1994.
The net loss for the current period resulted mainly from
exploration and ongoing administrative expense after receipt of
$470,000 in royalty and other property payments.
Royalty income received from the Crescent Pit for the year
included $183,000 in gold from the Company's net profits interest
royalty, and $111,000 from the capped NSR royalty. During the
current fiscal year, Cortez also recouped $363,000 of the advance
minimum royalties ("AMR") previously paid to the Company. At
June 30, 1995, the outstanding balance of advance minimum
royalties to be recouped was $87,000.
25
Costs of operations increased over the prior year primarily due
to the addition of an operations manager who is located at the
Company's field office at the site of Cortez Gold Mines in
Nevada, and increased engineering analysis of the resource
identified at the South Pipeline Project.
Consulting revenues and costs of consulting revenues increased
over the prior year primarily from one consulting arrangement.
General and administrative expenses of $1,015,000, for the year
ended June 30, 1995, increased from those of $753,000 for the
year ended June 30, 1994, as a result of increased employee
compensation. General and administrative expenses consist
primarily of employee compensation and benefits, office lease
expense, office equipment expenses, travel and communication
costs.
Exploration costs increased from $686,000 in fiscal 1994 to
$1,485,000 in fiscal 1995 due to increased drilling related
expenditures at the Long Valley and Buckhorn South properties,
expenditures related to the exploration on Union Pacific grounds,
and increased compensation for employees allocated to
exploration.
Abandonments and impairments decreased to zero in fiscal 1995
versus $749,350 in fiscal 1994 because no capitalized properties
were abandoned during the year.
Interest and other income was $386,000 in fiscal 1995, up from
$143,000 in fiscal 1994, due primarily to increased funds
available for investing from private placements of common stock.
At June 30, 1995, the Company had a gain of $76,000 in its U.S.
treasury securities portfolio due to the decrease in short term
interest rates.
Depreciation and amortization increased from $26,000 for fiscal
1994 to $102,000 for fiscal 1995, primarily due to the depletion
associated with the Company's capped royalty at South Pipeline.
Impact of Inflation
- -------------------
The Company's operations have been subject to general
inflationary pressures, which have not had a significant impact
on its operating costs.
26
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ROYAL GOLD, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
REPORT OF INDEPENDENT AUDITORS 28
FINANCIAL STATEMENTS
Consolidated Balance Sheets 30
Consolidated Statements of Operations 32
Consolidated Statements of Stockholders' Equity 33
Consolidated Statements of Cash Flows 35
Notes to Consolidated Financial Statements 37
27
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors
Royal Gold, Inc.:
We have audited the accompanying consolidated balance sheet of Royal
Gold, Inc. and Subsidiaries as of June 30, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Royal Gold, Inc. and Subsidiaries as of June 30,
1996, and the consolidated results of its operations and its cash
flows for the year then ended, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Denver, Colorado
August 26, 1996
28
REPORT OF INDEPENDENT AUDITORS
------------------------------
To the Board of Directors
Royal Gold, Inc.
We have audited the accompanying consolidated balance sheet of Royal
Gold, Inc. and Subsidiaries as of June 30, 1995, and the related
consolidated statements of operations, stockholders' equity, and cash
flows for the years ended June 30, 1995 and 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Royal Gold, Inc. and Subsidiaries as of June 30,
1995, and the consolidated results of their operations and their cash
flows for the years ended June 30, 1995 and 1994, in conformity with
generally accepted accounting principles.
Williams, Richey & Co.
Denver, Colorado
August 28, 1995
29
ROYAL GOLD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of June 30, 1996 and 1995
ASSETS
1996 1995
--------- ----------
Current Assets
Cash and equivalents (including $250,000
and $2,348,000, respectively, subject
to repurchase agreements) $ 3,308,292 $ 3,424,094
Marketable securities 5,015,000 5,011,570
Receivables
Trade and other 336,162 171,994
Related party 0 35,690
Royalty receivable in gold 1,637,573 28,835
Gold inventory 1,205,406 154,238
Prepaid expenses and other 131,718 89,907
Deferred income tax benefit 25,000 25,000
---------- ---------
Total current assets 11,659,151 8,941,328
Property and equipment, at cost
Mineral properties 1,832,091 554,588
Furniture, equipment and improvements 756,016 732,666
--------- ---------
2,588,107 1,287,254
Less accumulated depreciation
and depletion (931,997) (703,061)
--------- --------
Net property and equipment 1,656,110 584,193
Other Assets
Restricted investments and other 22,767 22,767
Deferred income tax benefit 725,000 725,000
------- -------
Total other assets 747,767 747,767
---------- ----------
Total Assets $14,063,028 $10,273,288
========== ==========
(continued)
The accompanying notes are an integral
part of these consolidated financial statements.
30
ROYAL GOLD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
as of June 30, 1996 and 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
--------- ----------
Current Liabilities
Accounts payable $ 487,252 $ 145,050
Current portion of note payable 0 27,866
Accrued liabilities
Retirement benefits 26,400 26,400
Other 15,877 19,161
-------- --------
Total current liabilities 529,529 218,477
Retirement benefit liabilities 110,549 116,949
Commitments and contingencies
(Notes 2, 6 & 9)
Stockholders' equity
Common stock, $.01 par value, authorized
40,000,000 and 30,000,000 shares,
respectively; and issued 15,478,152 and
14,492,962 shares, respectively 154,782 144,930
Additional paid-in capital 47,200,643 44,314,602
Accumulated deficit (33,852,502) (34,441,697)
---------- ----------
13,502,923 10,017,835
Less treasury stock, at cost
(15,986 shares) (79,973) (79,973)
---------- ----------
Total stockholders' equity 13,422,950 9,937,862
---------- ----------
Total liabilities and stockholders' equity $14,063,028 $10,273,288
========== ==========
The accompanying notes are an integral
part of these consolidated financial statements.
31
ROYAL GOLD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended June 30, 1996, 1995 and 1994
1996 1995 1994
--------- --------- ---------
Royalty income $3,680,145 470,421 152,501
Consulting revenue 31,544 163,681 30,401
Costs and expenses
Costs of operations 371,777 217,109 78,351
Direct costs of consulting 13,215 108,216 19,175
General and administrative 1,203,846 1,014,761 752,989
Exploration 1,434,264 1,484,599 685,556
Abandonments and impairments 0 0 749,350
Lease maintenance and
holding costs 274,864 189,921 163,613
Depreciation and depletion 228,936 102,398 25,518
--------- --------- ---------
Total costs and expenses 3,526,902 3,117,004 2,474,552
Operating income (loss) 184,787 (2,482,902) (2,291,650)
Interest and other income 441,728 386,035 142,819
Gain (loss)on marketable securities (37,320) 75,721 (47,276)
Interest and other expense 0 (4,075) (5,431)
--------- --------- ---------
Income (loss) before
income taxes 589,195 (2,025,221) (2,201,538)
Income tax benefit 0 0 750,000
--------- --------- ---------
Net income (loss) $ 589,195 $(2,025,221) $(1,451,538)
========= ========= =========
Net income (loss) per share $ 0.04 $ (0.14) $ (0.11)
Weighted average shares
outstanding 14,868,109 14,265,462 12,952,062
The accompanying notes are an integral
part of these consolidated financial statements.
32
ROYAL GOLD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended June 30, 1996, 1995 and 1994
Additional
Common Stock Paid-In
Shares Amount Capital
---------- ------- ----------
Balance, June 30, 1993 12,175,932 $121,759 $33,253,062
Issuance of common stock for:
Exercise of options 133,780 1,338 302,728
Exercise of warrants 101,000 1,010 5,855
Private placement 1,425,000 14,250 6,610,750
Issuance of treasury shares
for lease bonus payment 4,500
Net loss for the year
ended June 30, 1994
---------- ------- ----------
Balance, June 30, 1994 13,835,712 138,357 40,176,895
---------- ------- ----------
Issuance of common stock for:
Exercise of options 139,750 1,398 314,977
Exercise of warrants 17,500 175 23,855
Private placement 500,000 5,000 3,795,000
Issuance of treasury shares
for lease bonus payment 3,875
Net loss for the year
ended June 30, 1995
---------- ------- ----------
Balance, June 30, 1995 14,492,962 144,930 44,314,602
---------- ------- ----------
Issuance of common stock for:
Exercise of options 11,190 112 22,521
Exercise of warrants 974,000 9,740 2,863,520
Net income for the year
ended June 30, 1996
---------- ------- ----------
Balance, June 30, 1996 15,478,152 $154,782 $47,200,643
========== ======= ==========
(continued)
The accompanying notes are an integral
part of these consolidated financial statements.
33
ROYAL GOLD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, Continued
for the years ended June 30, 1996, 1995 and 1994
Total
Stock-
Accumulated Treasury Stock holders'
Deficit Shares Amount Equity
---------- ------ ------- ---------
Balance, June 30, 1993 ($30,964,938) 24,186 ($120,973)$ 2,288,910
Issuance of common stock for:
Exercise of options 304,066
Exercise of warrants 6,865
Private placement (6,000) 30,000 6,655,000
Issuance of treasury shares
for lease bonus payment (1,200) 6,000 10,500
Net loss for the year
ended June 30, 1994 (1,451,538) (1,451,538)
---------- ------ ------ ---------
Balance, June 30, 1994 (32,416,476) 16,986 (84,973) 7,813,803
---------- ------ ------ ---------
Issuance of common stock for:
Exercise of options 316,375
Exercise of warrants 24,030
Private placement 3,800,000
Issuance of treasury shares
for lease bonus payment (1,000) 5,000 8,875
Net loss for the year
ended June 30, 1995 (2,025,221) (2,025,221)
---------- ------ ------ ---------
Balance, June 30, 1995 (34,441,697) 15,986 (79,973) 9,937,862
---------- ------ ------ ---------
Issuance of common stock for:
Exercise of options 22,633
Exercise of warrants 2,873,260
Net income for the year
ended June 30, 1996 589,195 589,195
---------- ------ ------ ----------
Balance, June 30, 1996 ($33,852,502) 15,986 ($79,973)$13,422,950
========== ====== ====== ==========
The accompanying notes are an integral
part of these consolidated financial statements.
34
ROYAL GOLD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended June 30, 1996, 1995 and 1994
1996 1995 1994
----------- ---------- ---------
Cash flows from operating activities
Net income (loss) $589,195 ($2,025,221)($1,451,538)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and depletion 228,936 102,398 25,518
Unrealized (gain) loss on
marketable securities 37,320 (75,721) 47,276
Abandonments and impairments 0 0 749,350
Increase in deferred tax assets 0 0 (750,000)
Issuance of common stock
for services 0 0 30,000
Non cash exploration expense 0 8,875 10,500
(Increase) decrease in:
Trade and other receivables (128,478) (16,980) (170,128)
Marketable securities (40,750) (38,224) (4,944,902)
Royalties receivable in gold (1,608,738) (28,835) 0
Gold inventory (1,051,168) (154,238) 0
Prepaid expenses and other (41,811) (24,058) 12,083
Restricted investments 0 (10,000) 0
Increase (decrease) in:
Accounts payable and
accrued liabilities 311,052 8,198 69,004
Retirement and other
liabilities (6,400) (42,134) (6,248)
--------- ---------- ---------
Total adjustments (2,300,037) 270,719) (4,927,547)
Net cash provided by (used in) --------- --------- ---------
operating activities (1,710,842) (2,295,940) (6,379,085)
--------- --------- ---------
(continued)
The accompanying notes are an integral
part of these consolidated financial statements.
35
ROYAL GOLD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS CASH FLOWS, Continued
for the years ended June 30, 1996, 1995 and 1994
1996 1995 1994
----------- ---------- ---------
Cash flows from investing activities
Proceeds from disposition of:
Mineral properties 0 0 2,499
Capital expenditures for
property and equipment (1,300,853) (363,283) (35,361)
Net cash provided by (used in) --------- ------- ------
investing activities (1,300,853) (363,283) (32,862)
--------- ------- ------
Cash flows from financing activities
Proceeds from issuance of
common stock 2,895,893 4,140,405 6,935,931
Net cash provided by --------- --------- ---------
financing activities 2,895,893 4,140,405 6,935,931
Net increase (decrease) in cash --------- --------- ---------
and equivalents (115,802) 1,481,182 523,984
Cash and equivalents at beginning
of year 3,424,094 1,942,912 1,418,928
--------- --------- ---------
Cash and equivalents at end of year $3,308,292 $3,424,094 $1,942,912
========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid in fiscal 1996, 1995 and 1994 was $0, $10,685, and $0,
respectively.
Supplemental disclosure of non-cash activities:
In 1994, 6,000 shares of treasury stock valued at $30,000 were used as
partial payment for commission on a stock placement.
The accompanying notes are an integral
part of these consolidated financial statements.
36
1. Operations and Summary of Significant Accounting Policies
---------------------------------------------------------
Operations:
Royal Gold, Inc. (the "Company" or "Royal Gold"), was
incorporated under the laws of the state of Delaware on
January 5, 1981, and is engaged in the gold and other
precious metals business, primarily through passive and joint
ownership arrangements, and is also engaged in the
acquisition, exploration, development, and sale of gold
properties, and in the acquisition of gold royalty interests.
The Company also provides financial, operational, and
environmental consulting services to companies serving the
mining industry. Substantially all the Company's revenues
are and can be expected to be derived from royalty interests
rather than mining activity conducted by the Company.
Summary of Significant Accounting Policies:
The preparation of the Company's financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates
of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
Basis of Consolidation:
The consolidated financial statements include the accounts
of the Company, its wholly-owned subsidiaries and its
proportionate share of the accounts of unincorporated joint
ventures. All significant intercompany transactions and
account balances have been eliminated in consolidation.
Cash Equivalents:
For purposes of the statements of cash flows, the Company
considers all highly liquid investments purchased with an
original maturity of three months or less to be cash
equivalents. At June 30, 1996, the Company held $250,000
of U.S. government securities under an agreement to resell
in July 1996. Due to the short term nature of the
agreement, the Company did not take possession of the
securities which were instead held in the Company's
37
safekeeping account by FBS Investments Services, Inc. At
June 30, 1996, cash equivalents included approximately
$1,717,000 of temporary cash investments in an uninsured
government securities money market fund.
Marketable securities:
Marketable securities are classified as trading and
recorded at market value. At June 30, 1996, the Company
held U.S. treasury securities in a principal amount of
$5,000,000. The Company acquired these securities, with
maturities ranging from July 1996 to June 1997, at a cost
of $5,046,406. At June 30, 1996, the market value of these
securities was $5,015,000. Included in the statement of
operations is the net change in unrealized gains and
(losses) for the trading securities of $(37,320) and
$75,721 for the years ended June 30, 1996 and 1995,
respectively.
Royalties Receivable in Gold:
Royalties receivable consists of gold held by Cortez, the
operator, prior to making in-kind royalty payments. These
quarterly in-kind royalty payments are received one month
and one day after the production quarter. At June 30,
1996, 4,199 ounces of gold related to the June 30 quarterly
production is recorded as a receivable. This gold was
received on August 1, 1996. Royal Gold has exposure for
any changes in gold price on this receivable between the
end of the quarter and the time of receipt.
Gold Inventory:
Gold inventory on the balance sheet consists of this
refined gold bullion stored in safekeeping by the Company's
refiner in Utah. The inventory is carried at market value
with unrealized gains or losses included in the results of
operations for the period. At June 30,1996, the Company
held 3,128 ounces of gold bullion in inventory.
Mineral Properties:
Acquisition costs relating to mineral properties with a
known mineralization are deferred until the properties are
put into commercial production, sold or abandoned.
Exploration costs, including an allocation of employee
38
salaries and related costs, are charged to operations when
incurred. Mine development costs incurred to develop new
ore bodies, to expand or rehabilitate the capacity of
operating mines, or to develop areas substantially in
advance of production are deferred. For properties placed
in production, the related deferred costs are depleted
using the units-of-production method over the life of the
reserves. Deferred costs applicable to sold or abandoned
properties are charged against operations at the time of
sale or abandonment of the property. Upon disposition of a
portion of a mineral property, including equipment sales,
any proceeds are treated as a reduction of the carrying
value of the portion of the property retained.
The recoverability of the carrying value of development
projects is evaluated based upon estimated future net cash
flows from each property using estimates of contained
mineralization expected to be classified as proven and
probable reserves upon completion of a feasibility study.
Reductions in the carrying value of each property are
recorded to the extent that the Company's carrying value in
each property exceeds its estimated future discounted cash
flows.
Management's estimates of gold prices, recoverable proven
and probable reserves, operating, capital and reclamation
costs are subject to certain risks and uncertainties which
may affect the recoverability of the Company's investment
in property, plant and equipment. Although management has
made its best estimate of these factors based on current
conditions, it is possible that changes could occur in the
near term which could adversely affect management's
estimate of the net cash flows expected to be generated
from properties in operation.
Office Furniture, Equipment and Improvements:
The Company depreciates its office furniture, equipment and
improvements over estimated useful lives of 3 to 15 years
using the straight-line method. The cost of normal
maintenance and repairs is charged to expense as incurred.
Significant expenditures which increase the life of the
asset are capitalized and depreciated over the estimated
remaining useful life of the asset. Upon retirement or
disposition of office furniture, equipment, or
improvements, related gains or losses are recorded in
operations.
39
Reclamation Costs:
The Company records a liability for the estimated cost to
reclaim mined land based upon burdening estimated
production over the life of the mine with a proportional
share of such cost. The accrued reclamation liability is
reduced as reclamation expenditures are incurred. The
majority of reclamation expenditures will be incurred upon
permanent cessation of mining operations at the property
involved.
Income Taxes:
Deferred income taxes reflect the expected future tax
consequences of temporary differences between the tax basis
amounts and financial statement carrying amounts of assets
and liabilities at each year end and the expected future
benefits of net operating loss carryforwards, tax credits
and other carryforwards. General business credits are
accounted for by the flow-through method.
Reclassifications:
Certain accounts in the prior period financial statements
have been reclassified for comparative purposes to conform
with the presentation in the current period financial
statements.
Net Income or Loss Per Share:
Net income or loss per share is computed by dividing the
net income or loss by the weighted average number of common
shares outstanding during each year. Common stock
equivalents have been excluded from the computation since
the effect is immaterial or antidilutive.
2. Property and Equipment
----------------------
The net carrying value of the Company's property and equipment
consists of the following components at June 30, 1996 and 1995:
40
1996 1995
--------- ---------
Mineral Properties:
South Pipeline-
Net Profits Interest $ - $ -
South Pipeline-
Capped NSR Royalty 3,831 193,350
Long Valley 1,436,981 159,478
Camp Bird 120,110 120,110
--------- -------
1,560,922 472,938
Office furniture, equipment
and improvements 95,188 111,255
--------- -------
Net property and equipment $1,656,110 $ 584,193
========= =======
The Company's mining operations and exploration activities are
subject to various federal, state, and local laws and
regulations governing protection of the environment. These
laws are continually changing and, as a general matter, are
becoming more restrictive. Management believes that the
Company is in material compliance with all applicable laws and
regulations.
Presented below is a discussion of the status of each of the
Company's currently significant mineral properties.
A. South Pipeline Project
----------------------
The South Pipeline Project relates to a sediment-hosted gold
deposit located in Lander County, Nevada, and covers over 4,000
acres of unpatented mining claims.
In June 1992, believing that Placer Dome U.S., Inc. ("PDUS"),
60% owner of Cortez Gold Mines ("Cortez"), had withheld
material information in connection with a transaction of April
15, 1991, the Company commenced litigation against PDUS in
federal court in Colorado. The litigation was settled on
September 18, 1992, in an agreement pursuant to which the
Company re-acquired a significant new royalty interest in the
South Pipeline property.
Under the agreement, Cortez, as operator, committed to an
exploration and development work program. After payback, as
defined in the agreement, the Company will receive a 20% net
profits royalty or, at its election beginning with production
and annually thereafter, an Net Smelter Returns ("NSR") royalty
according to a schedule tied to indexed gold prices. The NSR
41
royalty ranges from 2.5% for an indexed price of $350 per ounce
to 5.5% for an indexed price in excess of $500 per ounce.
Under either royalty arrangement, the Company may elect to take
its royalty "in-kind."
The Company will receive advance royalty payments of $150,000
per year, and all such payments are to be recouped by Cortez
from production royalty payments.
If Cortez does not diligently proceed with development of the
Project, then the Company may elect to put the Project into
production, thereby securing 100% of the working interest
therein, subject to granting a 20% production royalty to Cortez
identical to the one described above. Royal Gold would then be
entitled to use, under a normal tolling arrangement and as
available, the Cortez milling facilities in the vicinity,
including any to be built for the Pipeline project.
B. Long Valley
-----------
In April 1989, the Company entered into a joint venture
agreement with Standard Industrial Minerals, Inc. ("Standard")
to explore and develop a property located in Mono County,
California (the "Long Valley Project"). During 1989 and 1990,
the Company delineated mineralization (the "South Zone")
estimated to host some 2.2 million tons of ore with an average
grade of 0.023 ounces of gold per ton. Metallurgical testing
and engineering analysis for a heap leach project was
completed, and applications for operating permits were filed,
but the Company subsequently determined to farm out its
interest in Long Valley.
In November 1993, the Company and Standard amended the joint
venture agreement to provide for the Company's option,
exercisable through December 31, 1997, to acquire the entirety
of Standard's interest at Long Valley upon payment of
$1,000,000. Option consideration payments aggregating $125,000
are payable each November of 1993, 1994, 1995 and 1996, with
$75,000 of such sum having been paid. Up to $100,000 of such
payments (the total of the payments due in 1995 and 1996) are
creditable against the option exercise amount.
The Company has conducted substantial exploratory drilling
programs at Long Valley in fiscal 1995 and fiscal 1996, and has
discovered additional deposits of gold mineralization.
42
Based on the results of the drilling, the Company has
determined that a proven/probable reserve exists at the Long
Valley property as of July 1, 1995.
C. Camp Bird Mine
The Camp Bird Venture (the "Venture") was formed in August
1986, primarily for the purpose of re-opening the Camp Bird
Mine, located in Ouray County, Colorado, as a gold and silver
mine.
At June 30, 1996, capitalized costs of $120,110 reflect the
Company's ownership of these patented mining claims.
Management believes these claims are valuable both for their
mineral and real estate potential.
3. Retirement Benefits
In 1987, the Company's Board of Directors agreed to provide
retirement benefits for the remaining lifetime of a former
executive officer. At June 30, 1996, the liability of $136,549
represents the net present value of estimated future payments
to this former officer.
4. Income Taxes
The tax effects of significant temporary differences and
carryforwards which give rise to the Company's deferred tax
assets and liabilities at June 30, 1996 and 1995, are as
follows:
43
1996 1995
--------- ---------
Net operating loss carryforwards $ 8,787,000 $ 8,025,000
Mineral property basis 0 58,000
Mineral properties 265,000 0
Other 135,000 203,000
--------- ---------
Total gross deferred tax assets 9,187,000 8,286,000
Valuation allowance (7,174,000) (7,310,000)
--------- ---------
Net deferred tax assets 2,013,000 976,000
--------- ---------
Gold inventory and receivable (995,000) (64,000)
Mineral property basis (204,000) 0
Mineral properties 0 (41,000)
Deferred taxable income (53,000) (98,000)
Other (11,000) (23,000)
--------- ----------
Total deferred tax liabilities (1,263,000) (226,000)
--------- ---------
Total net deferred taxes $ 750,000 $ 750,000
========= ==========
At June 30, 1996, the Company has approximately $25.1 million
of net operating loss carryforwards which, if unused, will
expire during the years 2001 through 2011. The Company's
ability to generate future taxable income to realize the
benefit of its tax assets will depend primarily on the timing
and amount of royalty revenue from its South Pipeline net
profits interest royalty. Based upon the determination, as of
June 30, 1996, of proven gold reserves at the Crescent Pit of
the South Pipeline Project (see Note 2.A.), and the production
schedule of royalty ore as currently estimated by the mine
operator, management has estimated that it is more likely than
not that the Company will have some net future taxable income
within the net operating loss carryforward period.
Accordingly, a valuation allowance against the deferred tax
asset has been established such that operating loss
carryforwards will be utilized primarily to the extent of
estimated future taxable income from the net profits interest
royalty and reversals of existing deferred tax liabilities.
The components of income tax expense (benefit) for the years
ended June 30, 1996, 1995 and 1994, are as follows:
44
1996 1995 1994
-------- -------- --------
Current tax expense $ - $ - $ -
Deferred tax (benefit) 136,000 (685,000) (766,800)
Increase (decrease) in
deferred tax asset
valuation allowance (136,000) 685,000 16,800
------- ------- -------
$ - $ - $(750,000)
======= ======= =======
The provision for income taxes for the years ended June 30,
1996, 1995 and 1994, differs from the amount of income tax
determined by applying the applicable U.S. statutory federal
income tax rate to pre-tax loss from operations as a result of
the following differences:
1996 1995 1994
------- ------- -------
Total expense(benefit)
computed by applying
statutory rate $ 200,000 $(689,000) $(749,000)
Adjustments of valuation
allowance (227,000) 685,000 16,800
Other 27,000 4,000 (17,800)
-------- -------- -------
$ - $ - $(750,000)
======== ======== =======
Included in the adjustments of valuation allowance is $136,000 related
to fiscal 1996 and $91,000 related to fiscal 1995 caused by changes in
1995 taxable temporary differences.
5. Commitments
-----------
Operating Lease
---------------
The Company leases office space under a lease agreement
which expires October 31, 1999. Future minimum cash rental
payments are as follows:
Years ending June 30,
---------------------
1997 122,300
1998 128,823
1999 132,084
2000 44,028
-------
$ 427,235
=======
The lease may be terminated at any time after October 31,
1997, upon proper notice and payment of a termination fee
equal to the next nine months' ensuing rent.
45
Rent expense charged to operations for the years ended June
30, 1996, 1995, and 1994, amounted to $143,300, $122,052 and
$135,936, respectively. The Company subleased a portion of
its premises on a month-to-month basis. The Company
recorded sublease rental income of $14,870, $35,831, and
$67,280, for the years ended June 30, 1996, 1995 and 1994,
respectively.
In order for the Company to maintain its current exploration
and development properties through fiscal 1997, the Company
would incur lease maintenance and holding costs of $350,000.
It can be anticipated, because of the nature of the
business, that exploration on many of these properties will
prove unsuccessful and that the Company will terminate its
interest in these properties rather than continue to pay
holding costs.
Employment Agreements
---------------------
The Company has one-year employment agreements with four of
its officers which require total minimum future
compensation, at June 30, 1996, of $323,000 through January
1997. The terms of each of these agreements automatically
extend, every February, for one additional year, unless
terminated by the Company or the officer, according to the
terms of the agreements.
6. Stockholders' Equity
--------------------
Preferred Stock:
The Company has 10,000,000 authorized and unissued shares of
$.01 par value Preferred Stock.
Private Placements:
During fiscal 1994, the Company completed two private
placements, for aggregate net proceeds of $6,655,000, from
the sales of a total of 1,425,000 shares at prices of $4 and
$6 per share.
During fiscal 1995, the Company completed a private
placement for net proceeds of $3,800,000, from the sale of
500,000 shares at $8.00 per share.
46
During fiscal 1996, warrants to purchase a total of 974,000
shares were exercised, providing proceeds to the Company of
$2,864,000.
Stock Options and Warrants:
During fiscal 1990, the Directors Stock Option Plan
("Directors Plan") was adopted and the Company reserved
200,000 shares of common stock for issuance under this Plan.
Only non-employee directors are eligible to participate.
Options granted under the Directors Plan are exercisable at
prices equal to the market value of the Company's common
stock at the date of grant. The options are exercisable for
a period of five years and terminate three months after the
director resigns or is removed from office. During fiscal
1996, no options were exercised. Additionally, options for
an additional 30,000 shares were issued during the year. As
of June 30, 1996, options are outstanding for 90,000 shares
at an average exercise price of $6.49 per share.
At February 5, 1993, the Board of Directors granted to a
director, who is a former president of the Company and
currently a consultant to the Company, a non-incentive
option to acquire up to 150,000 shares of the Company's
common stock, at a price of $3.75 per share. During each of
fiscal years 1995 and 1994, such director exercised options
for 75,000 shares, generating proceeds to the Company, in
each year, of $281,250.
During fiscal 1989, an Employee Stock Option Plan ("Employee
Plan") was adopted. In December 1994, shareholders approved
an amendment increasing the aggregate number of shares
available for issuance under the Employee Plan to 2,150,000.
Provisions of the Employee Plan provide for the issuance of
either incentive or non-qualified stock options or stock
appreciation rights. The options are exercisable at prices
equal to the market value of the Company's common stock as
of the date of grant and, in the event of incentive options,
expire ten years after the date of grant. (The non-
qualified options expire five years after the date of
grant.) There have been no stock appreciation rights
granted under the Employee Plan. During fiscal 1996,
options were exercised for 5,690 shares for a total of $625.
47
The following schedules detail activity related to options
and warrants for the years ended June 30, 1993, 1994 and 1995:
Optioned
Shares Option Prices
--------- ------------
Options Outstanding, June 30, 1993 1,202,350 0.13 to 3.75
Granted 62,500 4.00 to 9.13
Exercised (133,780) 0.13 to 3.75
Surrendered or expired (8,600) 0.44
---------
Options Outstanding, June 30, 1994 1,122,470 0.13 to 9.13
---------
Granted 229,250 7.88
Exercised (139,750) 0.13 to 3.75
---------
Options Outstanding, June 30, 1995 1,211,970 0.13 to 9.13
---------
Granted 191,000 8.50
Exercised (11,190) 0.13 to 7.88
Surrendered or expired (1,810) 7.88
---------
Options Outstanding, June 30, 1996 1,389,970 0.13 to 9.13
=========
Warranted
Shares Warrant Prices
--------- -------------
Warrants Outstanding, June 30, 1993 1,526,000 0.06 to 5.75
Exercised (101,000) 0.06 to 1.28
---------
Warrants Outstanding, June 30, 1994 1,425,000 0.06 to 5.75
---------
Exercised (17,500) 0.06 to 1.28
---------
Warrants Outstanding, June 30, 1995 1,407,500 0.06 to 5.75
---------
Exercised (974,000) 1.28 to 5.75
---------
Warrants Outstanding, June 30, 1996 433,500 0.06 to 1.50
=========
At June 30, 1996, under the Directors and Employee Plans and
otherwise, the following options are outstanding:
48
Number of Exercise Expiration
Shares Price Total Date
------- -------- -------- --------------
15,000 2.1875 $2,812 December 1997
29,500 4.00 118,000 December 1998
10,000 9.125 91,250 April 1999
45,000 7.875 354,375 December 1999
41,000 8.50 348,500 December 2000
902,720 .125 112,840 December 2001
15,000 4.00 60,000 December 2003
181,750 7.875 1,431,281 December 2004
150,000 8.50 1,275,000 December 2005
--------- ---------
1,389,970 $3,794,058
========= =========
Additionally, warrants to purchase the Company's common
shares are outstanding, as follows:
Number of Exercise Expiration
Shares Price Total Date
------- -------- -------- -------------
150,000 .0625 9,375 February 1997
283,500 1.50 425,250 July 1997
------- -------
433,500 $ 434,625
======= =======
The shares and exercise prices listed above are generally
subject to adjustment in accordance with anti-dilution
provisions of each of the warrant agreements.
Accounting for Stock-Based compensation (SFAS No. 123)
The Company expects to elect the disclosure alternative
proscribed by SFAS No. 123, "Accounting for Stock-Based
Compensation," in accordance with Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees" and its various interpretation. Under APB No.
25, no compensation cost is generally recognized for fixed
stock options for which the exercise price is not less than
the market price of the Company's Common Stock on the grant
date. Under the disclosure alternative of SFAS No. 123, the
Company will disclose, starting with its 1997 fiscal year,
its respective pro forma net income and earnings per share
as if the fair value based accounting method of SFAS No. 123
had been used to account for stock-based compensation cost
for all awards granted by the Company after July 1, 1995.
49
7. Major Customers
---------------
In each of fiscal years 1996, 1995, and 1994, $3,680,145,
$444,411 and $150,000, respectively, of the Company's
royalty income was received from the same source. (See Note
2.A.)
8. Simplified Employee Pension ("SEP") Plan
----------------------------------------
The Company maintains a SEP Plan in which all employees are
eligible to participate. The Company contributes a minimum
of 3% of an employee's compensation to an account set up for
the benefit of the employee. If an employee chooses also
to contribute to the SEP Plan through salary reduction
contributions, the Company will match such contributions to
a maximum of 7% of the employee's salary. During fiscal
1995, the Company contributed a total of $50,271 to the SEP
Plan. During fiscal 1996, the Company contributed a total
of $59,157 to the SEP Plan.
9. Contingencies
-------------
The Goldstripe Mine was an open pit, heap leach facility
located in Plumas County, California. A subsidiary of the
Company operated Goldstripe, but discontinued mining
operations after the 1989 season. The Company completed
required reclamation work on the mine pits and at the plant
facility site, and disposed of all major mining and crushing
equipment.
The Forest Service has advised the Company that all
outstanding requirements, except for post-reclamation
groundwater monitoring, have been satisfied.
At this time, the Company believes that it will have no
further reclamation liability related to the Goldstripe
property, unless post-reclamation groundwater monitoring
indicates unanticipated migration of residual cyanide into
ground or surface waters.
50
PART III
--------
Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Stanley Dempsey
- ---------------
Age 57; Director Since August 1984; Term Expires 1997
Chairman of the Board and Chief Executive Officer of the Company
since April 4, 1988. President and Chief Operating Officer of
the Company from July 1, 1987 to April 4, 1988. Consultant to
the Company from 1986 to 1987. Member of the Board of Directors
of Dakota Mining Corporation, Hazen Research, Inc. and Behre
Dolbear and Company, Inc. Prior to 1986, was a Vice President of
AMAX, Inc., Greenwich, Connecticut and Sydney and Perth,
Australia, and an attorney at law in private practice. (1)
Edwin W. Peiker, Jr.
- --------------------
Age 65; Director Since May 1987; Term Expires 1996
Director. President and Chief Operating Officer of the Company
from April 4, 1988, until retirement on February 1, 1992. Vice
President of Engineering of the Company from May 1987 to April 4,
1988. From 1983 to 1986, Mr. Peiker was engaged in mineral
consulting activities. Mr. Peiker was also a principal in Denver
Mining Finance Company from 1984 until 1986. During the period
1966-1983, Mr. Peiker was with the Climax Molybdenum division of
AMAX involved in exploration activities worldwide. (1) (2)
John W. Goth
- ------------
Age 69; Director Since August 1988; Term Expires 1997
Director. Director of Development of the Minerals Information
Institute and a consultant to the mining industry. Mr. Goth was
formerly a senior executive of AMAX, Inc. and a Director of Magma
Copper Company. Mr. Goth is a Director of U.S. Gold Corporation,
U.S. Zeolites Inc. and Banro Resources Corp. (2) (3)
James W. Stuckert
- -----------------
Age 58; Director Since September 1989; Term Expires 1998
Director. Chairman and CEO of Hilliard Lyons, Inc. Mr. Stuckert
is also a Director of Hilliard, Lyons, Inc., DataBeam
Corporation, McBar Medical Industries, and Lawson United
Corporation and a Board Member of the Security Industries
Association. (2) (3)
Pierre Gousseland
- -----------------
Age 74; Director Since June 1992; Term Expires 1998
Director. Financial Consultant. From 1977 until January 1986,
Mr. Gousseland is a director of Guyanor Ressources, S.A., Hanover
Gold Company, and SMB North America Inc. Mr. Gousseland was
Chairman and Chief Executive Officer of AMAX, Inc. Formerly,
Director of the French American Banking Corp. of New York, the
American International Group, Inc., Union Miniere, S.A.
(Belgium), Degussa AG (Germany) and IBM World Trade Europe/Middle
East Africa Corporation. Mr. Gousseland has served on the Chase
Manhattan and Creditanstaldt (Vienna, Austria) International
Advisory Boards and is Past President of the French American
Chamber of Commerce in the United States. (3)
51
S. Oden Howell, Jr.
- -------------------
Age 56; Director Since December 1992; Term Expires 1996
Director. Secretary and Treasurer of H&N Constructors, Inc., a
contractor specializing in remodeling and rehabilitation of
government facilities. From 1972 until 1988, Mr. Howell was
Secretary/Treasurer of Howell & Howell, Inc. He is currently
Director of Florafax International, Inc., and Lawson United
Corporation.
Merritt E. Marcus
- -----------------
Age 62; Director Since December 1992; Term Expires 1998
Director. President and Chief Executive Officer of Marcus Paint
Company, a manufacturer of industrial coatings and Performance
Powders, LLC, a manufacturer of industrial powder coatings. Mr.
Marcus is also a Director of Lawson United Corporation, and has
severed several terms as a Director of National Paint and
Coatings Association.
Thomas A. Loucks: Age 47
- ------------------------
Executive Vice President and Treasurer of the Company. From
August 1985 until August 1988, Mr. Loucks was a Business
Development Analyst with Newmont Mining Company.
Peter B. Babin: Age 42
- ----------------------
Executive Vice President of the Company since July 1, 1995,
formerly Senior Vice President from July 1993 through June 30,
1995. From 1989 until 1993, Mr. Babin was a consultant to the
Company. From 1986 through 1989, Mr. Babin was Senior Vice
President and General Counsel of Medserv Corporation.
Karen P. Gross: Age 42
- ----------------------
Vice President of the Company since June of 1994. Corporate
Secretary of the Company since 1989. From 1987 until 1989, Ms.
Gross was the Assistant Secretary to the Company and Executive
Assistant.
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
The officers of the Company have one-year employment agreements
that renew for an additional year in February each year.
52
ITEMS 11, 12, and 13
The information called for by Item 11, "Executive Compensation,"
Item 12, "Security Ownership of Certain Beneficial Owners and
Management," and Item 13, "Certain Relationships and Related
Transactions," is incorporated by reference to the Company's
definitive proxy statement to be filed with respect to the
upcoming Annual Meeting of Stockholders to be held December 10,
1996, in Denver, Colorado.
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following is a list of documents filed as part of this
report and are included herewith (*) or have been filed
previously:
(1) Financial Statements included in Item 8.
(2) Financial Statement schedules:
All Schedules are omitted because the information
called for is not applicable or is not required or
because the required information is set forth in the
financial statements or notes thereto.
(3) The following exhibits are filed with this annual
report on Form 10-K. The exhibit numbers correspond
to the numbers assigned in Item 601 of Regulation
S-K. Those exhibits that have been marked with an
asterisk are filed herewith; all other exhibits have
been previously filed with the Commission pursuant to
the Company's various reports on Forms 10-K, 10-Q,
8-K, S-1 and S-8, and are incorporated herein by
reference.
53
Exhibit
Number
------
3 (a) Certificate of Incorporation - Exhibit (b)
to the Company's Form 10-K for the fiscal
year ended December 31, 1980.
(b) Amendment to Certificate of Incorporation -
Exhibit (c) to the Company's Form 10-K for
the fiscal year ended December 31, 1980.
(c) Amendment to Certificate of Incorporation
dated February 2, 1983 - Exhibit 3 (c) of
Registration Statement on Form S-1,
Registration No. 2-84642.
(d) Amendments to Articles of Incorporation
dated May 7, 1987 - Exhibit (xiv) to the
Company's Form 10-K for the year ended
June 30, 1987.
(e) Amendment to Articles of Incorporation
dated February 2, 1988 - Exhibit 3(f) to
the Company's Form 10-K for the year ended
June 30, 1990.
(f) By-Laws - Exhibit (d) to the Company's Form
10-K, for the fiscal year ended December
31, 1980.
10 (a) Employee Stock Option Plan - Exhibit 4(a)
to the Company's Form S-8 dated February 6,
1990.
(b) Directors' Stock Option Plan - Exhibit 4(b)
to the Company's Form S-8 dated February 6,
1990.
(c) Lease of premises at 1660 Wynkoop Street,
Denver, Colorado, dated November 1, 1989 -
Exhibit 10 (c) to the Company's Form 10-K
for the year ended June 30, 1990.
54
(d) Agreement for Resolution of Disputes and
Litigation and for the Formation of the
South Pipeline Project, dated September 18,
1992, between Royal Crescent Valley, Inc.,
and Placer Dome U.S. Inc - Exhibit 10(l) to
the Company's Form 10-K for the year ended
June 30, 1992.
(e) Memorandum of Royalty Interest executed
September 18, 1992, by Royal Gold, Inc. and
Cortez Gold Mines - Exhibit 10(m) to the
Company's Form 10-K for the year ended June
30, 1992.
(f) Mining Lease and Purchase Option, dated
effective August 23, 1993, between Royal
Gold, Inc. and Donald K. Jennings, relating
to the "Ferb" claims, in Elko County,
Nevada - Exhibit 10(o) to the Company's
Form 10-K for the year ended June 30, 1993.
(g) Mining Claim and Purchase Option Agreement,
dated effective November 30, 1993, between
Standard Industrial Minerals, Inc. and
Royal Long Valley, Inc - Exhibit 10(p) to
the Company's Form 10-K for the year ended
June 30, 1994.
(h) Option Agreement and Grant of Exploration
Rights, dated effective May 1, 1994,
between Union Pacific Minerals, Inc. and
Royal Gold, Inc - Exhibit 10(q) to the
Company's Form 10-K for the year ended June
30, 1994.
(i) Amendment to Option Agreement and Grant of
Exploration Rights between Union Pacific
Minerals, Inc. and Royal Gold, Inc., dated
effective November 30, 1994, - Exhibit
10(k) to the Company's Form 10-K for the
year ended June 30, 1995.
(j) Assignment Agreement dated effective
December 1, 1994, between Royal Gold, Inc.
and Santa Fe Pacific Gold Corporation,
relating to the Bob Creek Project -
Exhibit 10(l) to the Company's Form 10-K
for the year ended June 30, 1995.
55
*(k) Second Amendment to Option Agreement and
Grant of Exploration Rights between Union
Pacific Minerals, Inc. and Royal Gold,
Inc., dated effective January 1, 1996.
*(l) Third Amendment to Option Agreement and
Grant of Exploration Rights between Union
Pacific Minerals, Inc. and Royal Gold,
Inc., dated effective August 15, 1996.
*(m) Consent of Independent Accountants
*(n) Consent of Independent Accountants
21 *(a) The Company and Its Subsidiaries.
(b) Reports on Form 8-K:
1. None.
* - Filed herewith.
56
EXHIBIT 21
THE COMPANY
AND ITS SUBSIDIARIES
ROYAL GOLD, INC. AND SUBSIDIARIES
Denver Mining Finance Company (1)
Royal Trading Company (1)
Calgom Mining Inc. (4)
Royal Long Valley, Inc. (1)
Royal Camp Bird, Inc. (1)
Royal Crescent Valley, Inc. (1)
Royal Kanaka Creek Corporation (1)
Environmental Strategies, Inc. (2)
GRAMEX LTD (3)
(1) Owned 100% by Royal Gold, Inc.
(2) Owned 100% by Denver Mining Finance Company
(3) Owned 50% by Royal Gold, Inc.
(4) Owns a 100% interest in the Goldstripe Project.
57
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ROYAL GOLD, INC.
Date: September 25, 1996 By:/S/Stanley Dempsey
------------------
Stanley Dempsey, Chairman,
Chief Executive Officer,
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Date: September 25, 1996 By:/S/Stanley Dempsey
------------------
Stanley Dempsey, Chairman,
Chief Executive Officer,
and Director
Date: September 25, 1996 By:/S/Thomas A. Loucks
-------------------
Thomas A. Loucks,
Treasurer
Date: September 25, 1996 By:/S/John Skadow
--------------
John Skadow
Controller
Date: September 25, 1996 By: /S/Edwin W. Peiker, Jr.
-----------------------
Edwin W. Peiker, Jr.,
Director
Date: September 25, 1996 By: /S/John W. Goth
---------------
John W. Goth,
Director
Date: September 25, 1996 By: /S/James W. Stuckert
--------------------
James W. Stuckert,
Director
58
Date: September 25, 1996 By: /S/Pierre Gousseland
--------------------
Pierre Gousseland,
Director
Date: September 25, 1996 By: /S/Merritt E. Marcus
--------------------
Merritt E. Marcus
Director
Date: September 25, 1996 By: /S/S. Oden Howell, Jr.
----------------------
S. Oden Howell, Jr.
Director