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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, 1998.
Commission File No. 0-5664
ROYAL GOLD, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 84-0835164
-------------------------------- -------------------
(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 NASDAQ National Market System
-------------------------------- ------------------------------------
(Title of Class) Name of Exchange on which registered
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 27, 1998, the average bid and asked price of the Company's
stock was $3.53. The aggregate market value of voting stock held by non-
affiliates was $45,023,000. As of August 27, 1998, there were 16,926,876
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 November 17, 1998: Part III, Items 11, 12 and 13.
Total Number of Pages: 65 Exhibit Index - Page 63
TABLE OF CONTENTS
Part I PAGE
Items 1.
and 2. Business and Properties 1
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote
of Security Holders 25
Part II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 26
Item 6. Selected Financial Data 27
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 28
Item 8. Financial Statements
and Supplementary Data 32
Part III
Item 10. Directors and Executive Officers of the
Registrant 57
Item 11. Executive Compensation 58
Item 12. Security Ownership of Certain Beneficial
Owners and Management 58
Item 13. Certain Relationships and Related
Transactions 58
Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 59
Exhibit A. The Company and Its Subsidiaries 62
Signatures 63
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
from projections or estimates include, among others, decisions and activities
of Cortez regarding 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, delays 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 Gold" or the
"Company"), is engaged in the acquisition, exploration and
development of gold properties, and in the acquisition of gold royalties.
The Company conducts exploration and development activity on gold and other
properties containing precious minerals 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
seeks to acquire existing royalties. Substantially all of 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 interests are a carried 20% net
profits royalty interest in the South Pipeline property, operated by Cortez
Gold Mines, and a 1.75% net smelter returns royalty interest on
approximately 81% of the Bald Mountain mine, operated by Placer Dome U.S.
Inc. 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 1998, the Company generated revenues of
$2,175,786 from its royalty interest at South Pipeline. Effective January
1, 1998, the Company purchased an existing royalty on portions of the Bald
Mountain Mine. During fiscal 1998, this royalty yielded $128,643 in
revenues to Royal Gold. The Company also owns three other royalty interests
on exploration projects in Nevada. The Company also conducted its own
development program at Long Valley, in Mono County, California, and is
engaged in exploration at the Milos Gold project, Milos Greece, and at
several other prospects in Nevada. The Company is also evaluating
opportunities in Europe and Australia.
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 1998, income generated from consulting services was not material.
1
The Company was incorporated under the laws of the State of Delaware on
January 5, 1981. Its executive offices are located at 1660 Wynkoop Street,
Suite 1000, Denver, Colorado 80202. See Exhibit 21, "The Company and Its
Subsidiaries."
Developments During Fiscal 1998
- - -------------------------------
The highlights of fiscal 1998 were:
(1) The Company earned $2,047,143 on its net profits interest at South
Pipeline. Mill-grade ore yielded $1,604,856 and heap leach material
produced revenues of $442,287. This compares with $8,899,537 earned on its
net profits in fiscal 1997.
(2) Effective January 1, 1998, the Company acquired a 50% undivided
interest in a 3 1/2% sliding-scale net smelter return royalty that burdens
approximately 81% of the Bald Mountain Mine, White Pine County, Nevada. At
December 31, 1997, the portion of the mine covered by this royalty contained
proven and probable reserves of 11,628,000 tons of ore, at an average grade
of 0.064 ounces per ton ("opt"), containing approximately 748,000 ounces of
gold. The Company acquired the interest for $2,250,000 and assumed $218,312
in debt. The Company earned $128,643 on its royalty interest at Bald
Mountain.
(3) In March 1998, the Company signed agreements with Athens-based Silver
and Baryte Ores Mining Company S.A., and with an Australian investor group,
to explore for and mine gold and other materials in the public mining areas
on the Greek island of Milos, and on other islands in the Cyclades chain, in
the south Aegean Sea. Under the Agreement, Royal Gold and the Australian
investors will jointly fund not less than $5.0 million ($2.5 million each)
in exploration and development expenses on the Milos project during a three
year period, at a rate of at least $1.7 million per year.
(4) In December 1997, the Company's estimate of the mineralized deposit at
South Pipeline was increased to 113 million tons of mineralized material,
with an average grade of 0.046 opt, based on drilling during the period
September 1994 through calendar year 1997 carried out by Cortez. At June
30, 1998, Cortez updated its reserve estimate (to reflect a gold price of
$350 per ounce) at South Pipeline to 70.6 million tons of ore at an average
grade of 0.045 ounces of gold per ton, containing 3.15 million ounces of
gold.
(5) In December 1997, gold spot prices fell to $283 per ounce, an eighteen
year low. Subsequent to June 30, 1998, the gold price was depressed further
to $273 per ounce.
(6) In August 1997, the Company entered into an agreement with Amax Gold,
Inc. This agreement provided that Amax Gold had an option, exercisable
2
through December 31, 1997, to enter into a lease and become responsible for
further exploration, permitting, and development of the Long Valley project.
Upon execution of this agreement with Amax Gold, the Company received a
payment of $150,000. In November 1997, Amax Gold, Inc. terminated its
option to explore the Long Valley property.
(7) The Company increased its reserve estimate at the Long Valley property
to 39.1 million tons of ore, at an average grade of 0.018 opt, containing
704,000 ounces of gold (at an assumed gold price of $350 per ounce). (See
"Properties - Long Valley" below.)
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.
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 Dome U.S. Inc.
("PDUS") and Kennecott Corporation. 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.)
During payback of capital expenditures, the Company receives 4% of net
profits. After payback of capital expenditures, the Company, at its annual
election, can either receive a 20% net profits royalty interest or a sliding
scale 2.5% to 5.5% net smelter returns ("NSR" (1)) royalty interest in all
- - ------------------------
(1)"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.
3
production from the GAS Mining Claims. Under either royalty interest, the
Company may elect to take its share of production in-kind. In November
1997, the Company made its annual election to receive its production in-kind
for the next year.
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
years 1988, 1989 and 1990 resulted in identification of one sediment-hosted,
"Carlin-type" disseminated gold deposit and the identification of other gold
anomalies.
In 1991, the Company decided to sell its interest in the property to Cortez.
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. Under the Agreement, Cortez, as operator and
manager, committed to an exploration and development work program and also
agreed to pay the Company an advance minimum royalty of $150,000 per year,
for the life of the project. The Company's royalty will be subject to
payback of certain capital expenditures by Cortez for each new mining unit
put into production. During payback, the Company will receive a 4% net
profits interest. After payback, 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. Under
either royalty arrangement, the Company may elect to take its royalty "in-
kind."
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 built or to be built for the Pipeline project.
4
Development
- - -----------
Since November 1992, Cortez has conducted an aggressive program of
exploration and development drilling at South Pipeline, and has spent over
$20 million through June 30, 1998.
On December 31, 1996, Cortez announced that the mineral deposit at South
Pipeline was estimated to contain 86.1 million tons of ore, with an average
grade of 0.048 opt. In May 1997, the Company announced that its estimate of
the mineral deposit at South Pipeline had increased to 112.9 million tons of
ore at an average grade of 0.046 ounces of gold per ton. In December 1997,
the Company announced that its estimate of the mineral deposit at South
Pipeline had increased to 116.6 million tons of ore at an average grade of
0.047 ounces of gold per ton.
In addition to the South Pipeline gold deposits that have been defined to
date, other important gold intercepts have been made on the South Pipeline
property, which suggests that additional deposits may exist on the property.
Additional exploration was conducted through calendar year 1997, as Cortez
focused on expanding the South Pipeline reserve. Based on this drilling,
Cortez increased the reserve at South Pipeline to 70.6 million tons of ore,
at an average grade of 0.045 opt, containing 3.1 million ounces. This
increase in reserves is net of all production at the Crescent Pit.
In June 1994, Cortez began open pit mining at the Crescent Pit, a near-
surface portion of the South Pipeline deposit. Initially, Cortez combined
the Crescent Pit ore with ore from the Pipeline mine (in which the Company
has no interest), and processed all such ore at the Cortez mill ("Cortez
#1"), a 2,000 ton per day facility that is located a few miles east of the
Crescent Pit. In February 1996, Cortez notified the Company that it would
stop commingling ores at the Cortez mill and that it would dedicate the
Cortez mill exclusively to Crescent Pit mill ore, at least through the end
of calendar year 1996. Beginning in March 1997, Cortez committed 100% of
the capacity of its new Cortez mill (Cortez #2) to Crescent Pit ore. This
new mill, constructed by Cortez for the processing of its Pipeline deposit,
was designed for throughput of 10,000 tons of ore per day. With this
increase in processing capacity, the production at the Crescent Pit
increased substantially, and was completed on June 24, 1997.
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 an open pit project immediately 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. Processing of the
Pipeline Deposit commenced on June 28, 1997. The mine life of Pipeline is
estimated to be five plus years after commissioning of a mill with
throughput of 10,000 tons of ore per day. Cortez also stated that South
5
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.
Subsequent to year-end, PDUS advised the Company that Cortez now forecasts
an acceleration of the development and production of the South Pipeline
deposit, with the recent completion of the 1998 life of mine plan update.
PDUS advised the Company that it projects the total cash production cost of
operations at South Pipeline for the first five years of production, based
on the current reserve estimate, will vary between $120 and $155 per ounce
(in constant 1998 U.S. dollars). The current mine plan anticipates that all
required permits for the full-scale mining and processing of South Pipeline
ore may be issued prior to July 1999, and that Cortez will commence pre-
stripping operations at South Pipeline in 2001, with significant production
for South Pipeline commencing in 2002. The Company will receive 4% of net
profits during payback of capital expenditures.
Timing of production at the South Pipeline deposit remains subject to
permitting and decisions of the operator. The Company continues to monitor
the progress of development of the South Pipeline deposit and meets
periodically with PDUS to ensure compliance with the terms of the Agreement.
Cortez has advised the Company that it has been planning to develop the
Pipeline/South Pipeline deposits on a sequential basis. The Company's
Agreement with Cortez contemplates the possibility of this situation and has
provisions to ensure that development of the South Pipeline deposit is not
discriminated against, even in the event that the operator has more
profitable opportunities in the area. The Agreement states that Cortez
shall be the sole judge of the rate and manner of production and processing
of ore, so long as its judgments are based upon its good faith determination
of what a prudent operator would do with respect to production at South
Pipeline, without regard to other properties or facilities operated by
Cortez in the vicinity. In order to fulfill this prudent operator test,
Cortez has created a "stand alone" study that considers development of South
Pipeline without regard to its Pipeline project. The Company is currently
preparing its own stand alone analysis, and the Company continues to have
discussions with PDUS regarding this discrimination issue.
Crescent Pit Operations
- - -----------------------
The Crescent Pit operation, encompassing 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. Gold production from the Crescent
Pit has exceeded initial expectations, for both mill-grade and heap leach
material.
6
Crescent Pit Production
- - -----------------------
During fiscal 1998, Royal Gold earned $2,047,143 on its 20% net profits
interest royalty at the Crescent Pit, a portion of the South Pipeline
deposit. Royalties from mill-grade ore were $1,604,856 which relates to
material that was work-in-process inventory at June 30, 1997. All mill-
grade material from the Crescent Pit has been processed. During fiscal
1998, the Company earned $442,287 from production relating to Crescent Pit
heap leach operations. At June 30, 1998, 473,450 tons of ore at an average
grade of 0.023 opt of Crescent Pit heap leach ore was stockpiled.
7
Set forth below is an illustration of the Company's net profits interest
royalty from the substantially completed Crescent Pit. This chart details
the life of mine production for the Crescent Pit, in which the Company holds
a 20% NPI:
Crescent Pit
Life of Mine Production
September 1994 Through June 30, 1998
Mill Heap Leach Combined
----------- ----------- -----------
Tons 2,265,128 3,243,109 5,508,237
Grade 0.147 0.024 0.075
Recoveries 87% 69%(1) 84%
Ounces 290,222 53,998 344,220
Average Gold Price 368 366 367
----------- ----------- -----------
Revenues $106,660,269 $ 19,789,579 $126,449,848
Costs 37,721,702 3,666,214 41,387,916
----------- ----------- -----------
Net Profits $ 68,938,567 $ 16,123,365 $ 85,061,932
=========== =========== ===========
4%/20% NPI $ 13,787,713 $ 3,224,673 $ 17,012,386
Capital recouped 1,204,717 757,918 1,962,635
----------- ----------- -----------
Royalty to
Royal Gold $ 12,582,996 $ 2,466,755 $ 15,049,751
=========== =========== ===========
NSR Equivalent (2) 11.8% 12.5% 11.9%
Royalty per ounce $43.36 $45.68 $43.72
Cash Cost/Oz $130 $68 $120
Total Cost/Oz (3) $151 $138 $149
(1)Heap leach production is ongoing on the current heap leach pad.
Stockpiled material is being added periodically and cumulative recovery
rates should increase over time.
(2)NSR Equivalent is computed by dividing the royalty received by the
total revenues and is indicative of the level of NSR that would be
required to receive the same amount of royalty.
(3)Total cost includes capital recoupment.
Note: This information is not necessarily indicative of the royalty that
will be received at the larger South Pipeline deposit. At the South
Pipeline deposit a higher stripping ratio will be encountered, more of the
material will be processed by heap leach production, and certain economies
of scale will be realized.
8
Reserves and Other Mineralization
- - ---------------------------------
Set forth below is a table showing the reserves that have been defined at
the South Pipeline property, in which the Company holds a 20% NPI:
South Pipeline Property
Proven and Probable Reserves (1)
June 30, 1998
Average
Tons Grade Contained
(millions) (oz Au/ton) Oz Au (2)
---------- ----------- ---------
South Pipeline Deposit:
Mill Grade Ore (3) 13.7 0.123 1,688,000
Heap Leach Ore (3) 56.9 0.026 1,459,000
(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 86% for South Pipeline
mill-grade ore, and 65% for heap leach material. These reserves are based
on an expected gold price of $350 per ounce.
(3) Amounts shown represent 100% of the reserves. The Company holds a 20%
NPI in this property.
9
Set forth below is a table showing the additional gold deposit that has been
defined at the South Pipeline property, in which the Company owns a 20% NPI:
South Pipeline Property
Gold Deposits/Mineralization (1)(2)
December 31, 1997
Average
Tons Grade
(millions) (oz Au/ton)
---------- -----------
South Pipeline Deposit 46.0 0.051
(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.
Long Valley
- - -----------
The Long Valley project consists of 197 unpatented mining claims located 45
miles north of Bishop, in Mono County, California. 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 92
claims.
Under the joint venture agreement, the Company has an option, exercisable
through December 31, 1998, to acquire the entirety of Standard's interest in
Long Valley for $900,000. During the term of the option, 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 Gold determined the existence of two new
areas of gold mineralization (the "Hilton Creek Zone" and the "Southeast
10
Zone"). These two areas are separated by about 2,000 feet, and it is
estimated that such zones contain a total of 49,640,000 tons of gold
mineralization, with an average grade of 0.018 opt.
Royal Gold has continued to drill at Long Valley since 1994 and, through
June 30, 1998, has completed more than 550 reverse-circulation holes,
aggregating more than 168,000 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 drilling results, the Company commissioned 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 designated this project as a development property as of
July 1, 1995. All costs incurred at Long Valley since July 1, 1995 have
been capitalized.
In August 1997, the Company entered into an agreement with Amax Gold, Inc.
This agreement provided that Amax Gold had an option, exercisable through
December 31, 1997, to enter into a lease and become responsible for further
exploration, permitting, and development of Long Valley, and for
construction and operation of any mine that may be developed. Amax Gold was
able to terminate the agreement at any time, but would thereby relinquish
any interest in the property. Upon execution of this agreement with Amax
Gold, the Company received a payment of $150,000. In November 1997, Amax
Gold Inc. terminated its option to explore the Long Valley property.
In November 1997, the Company announced an increase in the reserve estimate
for Long Valley. Based on Royal Gold's drilling results through August
1997, Long Valley contains proven and probable reserves, at a gold price of
$350 per ounce, of approximately 39.1 million tons of ore, averaging 0.018
opt (at a cut-off grade of 0.008 opt). The reserves are contained within a
mineralized deposit that includes approximately 47.0 million tons of
oxidized material, averaging 0.018 opt (using a cut-off of 0.01 opt).
In December 1997, Royal Gold announced that it had secured, for $100,000, a
one-year extension of its option to acquire all of the interest of Standard
Industrial Minerals Inc. in the Long Valley Gold project. Under the terms
of the extension, Royal Gold is required to pay $900,000 to Standard
Industrial Minerals by December 31, 1998, or else it will forfeit the right
to acquire all of Standard Industrial's interest in the Long Valley project.
11
Reserves and Other Mineralization
- - ---------------------------------
Set forth is a table showing the proven and probable reserves that have been
defined at Long Valley:
Long Valley Property
Proven and Probable Reserves (1)(3)
June 30, 1998
Average
Tons Grade Contained
(millions) (oz Au/ton) Oz Au (2)
---------- ----------- ---------
Long Valley 39.1 0.018 704,000
(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 0.010 ounces per ton of gold.
In addition to the above identified reserves at Long Valley, the Company has
identified additional mineralization of 8.7 million tons of mineralized
material at an average grade of 0.018 opt. This gold mineralization has not
been included in the proven and probable ore reserve estimates because even
though drilling, trenching and/or underground work indicates a sufficient
12
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 complete, and until
other economic and technical feasibility factors based upon such work are
resolved.
Bald Mountain Royalty
- - ---------------------
Effective January 1, 1998, the Company purchased a 50% undivided interest in
a sliding-scale net smelter returns royalty that burdens approximately 81%
of the Bald Mountain Mine, White Pine County, Nevada, Bald Mountain is an
open pit, heap leach mine that is operated by Placer Dome U.S. Inc ("PDUS").
The Company purchased the royalty, effective January 1, 1998, for a cash
consideration of $2,250,000 and assumption of $218,312 in debt to the
operator. One-half of each quarterly royalty payment is being withheld by
the operator until this debt is paid in full.
At December 31, 1997, the portion of the mine covered by this royalty
contained proven and probable reserves of 11,628,000 tons of ore, at an
average grade of 0.064 ounces per ton ("opt"), containing approximately
748,000 ounces of gold. At June 30, 1998, PDUS advised the Company that the
mineral deposit related to the Company's royalty was estimated to contain
proven and probable reserves of 12,594,000 tons of ore, with an average
grade of 0.061 opt of gold, containing approximately 771,000 ounces of gold.
In addition PDUS informed the Company that the property contains additional
mineralization of 10,942,000 tons of mineralized material at an average
grade of 0.037 opt of gold.
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, to reflect
additional expenditure levels, and an emphasis on diamond exploration on the
State Line District of Colorado and Wyoming. The entire term of the
agreement remained unchanged, expiring on December 31, 1999, with aggregate
exploration commitments totaling $2.375 million. Royal Gold may also elect
to terminate the agreement after spending at least $375,000 in either of
calendar years 1997 or 1998. The Company has met these spending
obligations.
13
The Company identified ten large prospect areas in the State Line District
where it conducted geochemical sampling surveys that 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. During the fall and winter of 1997, the
Company drilled six of the target areas without encountering any
kimberlites. 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 within any of the ten prospect areas, or anywhere else in the
State Line District. The Company conducted additional geochemical sampling
in 1998, and is now evaluating the results of that work.
If the Company identifies attractive deposits on the UPR lands, it has the
opportunity, under the terms of its agreements 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 leased 131 such
claims from Ronald and Arlene Damele, et al., and the Company staked the
balance of the project area. 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 opt.
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.
14
During 1995, the Company drilled 24 reverse-circulation holes, totaling
13,825 feet. As anticipated, gold mineralization was discovered, and
several of the drill holes contained intervals exceeding 0.01 opt.
During fiscal 1997, seven additional reverse-circulation holes were drilled.
Gold mineralization in five of these drill holes contained intervals
exceeding 0.045 opt of gold.
During fiscal 1998, the Company optioned its Buckhorn South project, to
Independence Mining Company, Inc.("IMC"). Under the agreement, IMC was to
explore Buckhorn South and, depending upon the exploration results, take an
assignment of Royal Gold's interest in the property, subject to assumption
of all existing burdens and with Royal Gold retaining a 14% NPI royalty.
After the close of the fiscal year, IMC exercised its option at Buckhorn
South, and Royal Gold assigned its working interest in the property to IMC,
in exchange for various net profits and net smelter return royalties as
follows:
a) A 14% net profits interest in any mineral production for Buckhorn
South;
b) Conveyance by IMC to Royal Gold of a 2% net smelter returns royalty
on production from Lone Mountain, a 49-claim parcel that is near IMC's
Jerritt Canyon operation, in Elko County, Nevada; and
c) Conveyance by IMC to Royal Gold of a 15% net profits interest royalty
on production from 24 claims that comprise a portion of IMC's Carico Lake
property, in Lander County, Nevada, and conveyance of a 2% net smelter
returns royalty on production for the other 381 claims that make up the
Carico Lake property.
Milos Gold Project
- - ------------------
In March 1998, the Company signed agreements with Athens-based Silver &
Baryte Ores Mining Company S.A., and with an Australian investor group, to
explore for and mine gold and other minerals in the public mine areas on the
Greek island of Milos, and on other islands in the Cyclades chain, in the
south Aegean Sea.
Silver & Baryte, through its Greek subsidiary Midas S.A., holds a Greek
lease to prospect, explore, and mine gold from public mining sites on the
island of Milos and on the related islands.
Under the agreements, Royal Gold and the Australian investors will jointly
fund not less than $5.0 million ($2.5 million each)in exploration and
development expenses on the Milos project, over a period of three years, at
15
a rate of at least $1.7 million per year. Royal Gold is the operator of the
project.
Upon completion of the $5.0 million in expenditures, Royal Gold and the
Australian investors will have earned a 50% interest in Midas S.A., and the
parties will thereafter participate jointly in further exploration and
development. Silver & Baryte may elect to maintain a 50% interest in Midas
S.A., or convert to a 20% net profits interest or a 5% net smelter returns
interest, in any mining project on Milos.
Prior exploration at Milos by Silver & Baryte and by Renison Goldfields, a
major Australian gold producer, has confirmed that the island has the
potential to host epithermal gold deposits.
Manhattan Project
- - -----------------
The Manhattan project is located in Nye County, Nevada, approximately 60
miles north of Tonopah. Through two transactions, Royal Gold has
consolidated a sizable land position in this historic mining district, and
is currently conducting the first round of drilling at the property.
The first transaction, executed in December 1997, gave Royal Gold the right
to explore for gold on four separate parcels that had been assembled by New
Concept Mining, Inc. These parcels, aggregating 3 patented and 115
unpatented mining claims had been the object of prior exploration, which
identified some mineralization of gold.
Under the New Concept agreement, the Company took a responsibility for
underlying landowner payments totaling $875,000 over a four year period,
together with an annual work commitment of $250,000 and reservation of a 4%
NSR in favor of New Concept. The New Concept agreement also provided that
Royal Gold has an option, exercisable through November 30, 2001, to acquire
all of New Concept's interest in the project following aggregate payments of
$3.475 million.
The second transaction was executed in August 1998, following the close of
the fiscal year. Royal Gold entered into a joint venture with Battle
Mountain Gold to explore and develop a parcel, known as "Black Mammoth,"
that consists of 33 unpatented claims and one patented claim. Black Mammoth
is contiguous with two of the four parcels that Royal Gold controls through
the New Concept arrangement.
Under the joint venture agreement with Battle Mountain, Royal Gold is the
operator of the project, and may earn a 50% interest in Black Mammoth by
funding and managing $650,000 in exploration work over a four year period,
with a first year work commitment of $150,000.
16
As of August 31, 1998, the Company had embarked upon a 10,000 to 15,000 foot
reverse circulation drilling program that would test designated drill
targets on all of the Black Mammoth and contiguous New Concept parcels, and
would also satisfy the respective work commitments for each property.
Alligator Ridge
- - ---------------
Alligator Ridge is located about 100 miles south-southeast of Elko, in White
Pine County, Nevada, and about 30 miles directly south of Placer Dome's Bald
Mountain operations.
In August 1998, then Company entered into an agreement with Placer Dome
U.S., Inc. pursuant to which Royal Gold will undertake approximately $4
million in exploration work, over the next six years. Depending on the
results of Royal Gold's exploration program, and at the option of Placer
Dome, either Royal Gold will acquire ownership of up to 1,638 unpatented
claims that are now included within the Alligator Ridge claim block (such
conveyance would be subject to a reservation by Placer Dome of a 5% net
proceeds royalty interest), or else Placer Dome will reimburse Royal Gold
for 200% of its cumulative investment in Alligator Ridge, and will also
grant to Royal Gold a 22% net proceeds royalty interest in any future
production.
Over the period 1980 through 1992, cumulative production from Alligator
Ridge was approximately 700,000 ounces of gold. Since Placer Dome acquired
the property in 1993, it has produced 160,000 ounces, primarily from heap
leach operations in the Yankee and Vantage Basins. (The Yankee and Vantage
Basins comprise 329 claims and are excluded from this agreement because of
continuing production and reclamation operations in those areas.)
Under the terms of the agreement, Royal Gold has a firm commitment to spend
at least $300,000 in defined work during the first year. In years two
through six, Royal Gold must spend successively greater amounts to keep the
agreement in force, but the Company may also unilaterally terminate the
agreement at any time after the first full year. Maximum required
expenditures by Royal Gold over the six year term of the agreement are $4
million. Claims maintenance fees and other land holding costs are included
in the work commitments.
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,
17
and $150,000 per year from 2001 through 2003. In April 1995, five reverse
circulation holes were completed totaling 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 and December 1997.
Other Exploration Properties
- - ----------------------------
During fiscal 1998, the Company explored five additional properties in
Nevada and Utah, and determined to terminate its interest in the two Utah
properties and in one of the Nevada properties. 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. As significant results are
generated at any exploration property, the Company will re-evaluate the
property, and the Company may substantially increase or decrease the level
of expenditures on any particular property, at any time.
Other Foreign Exploration
- - -------------------------
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 was for an initial term of two years, requiring
expenditures of $100,000 per year by GRAMEX. The agreement was extended for
an additional two year period, expiring 1999. The Company is obligated to
fund 50% of GRAMEX's expenditures.
GRAMEX and Phelps Dodge Exploration Corporation ("PDX") joined together to
form a Bulgarian company named Sofia Minerals Ltd. ("SOMIN"). SOMIN is a
joint venture company held equally by GRAMEX and PDX. SOMIN will explore,
evaluate and develop properties in Bulgaria. SOMIN has signed a concession
agreement with the Bulgarian Committee of Geology and Mineral Resources to
conduct geological research in two major areas in Bulgaria.
The Company has also formed an entity that will seek to acquire existing
gold royalties in Australia as well as invest in junior Australian resource
companies with emerging or advanced exploration projects. Investment may be
by way of loans with a convertibility element to royalties at a later stage.
18
The new company, Royal Australia Pty Ltd, is based in Perth, Western
Australia, and the Company has a 67% interest in the entity. The remainder
of the equity in the new entity is held by affiliates of Resource Finance
Corporation ("RFC"). RFC is an investment and merchant banking firm that
caters to natural resource firms.
Sales Contracts
- - ---------------
The Company sold 23,000 ounces of gold bullion in fiscal 1998, utilizing two
metal traders during the period, at an average realized price of $298.75/oz.
The Company maintains trading relationships with a number of metal traders.
The Company is currently receiving its net profits interest royalty in-kind.
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 September 1, 1998, the Company had fifteen full-time employees located in
Denver, Colorado. 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
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, and 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,
19
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 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 properties and operations in which it retains interests
are currently in material compliance with all applicable laws and
regulations.
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 other 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 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.
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,
20
the exchange rate 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.
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 of gold based on the London PM fix.
Year Gold Price Per Ounce($)
---- -----------------------
High Low
---- ----
1993 406 327
1994 396 370
1995 393 372
1996 416 368
1997 367 335
January-June, 1998 313 279
At August 29, 1998, the gold price was $273.40 per ounce, a nineteen year
low. At present, the Company has no hedging programs in place. At June 30,
1998, the Company held 150 ounces of gold bullion in inventory.
Additionally, at June 30, 1998, the Company had a royalty receivable of 278
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.
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.
21
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. The
Long Valley project is very sensitive to the gold price and a sustained
period of low gold prices could affect the Company's ability to farm out
this project.
Proposed Federal Legislation
- - ----------------------------
The U.S. Congress recently considered 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 and it is
anticipated that another bill may be introduced in the Senate yet this
session, and it is possible that a new law could be enacted. The Company
expects that if and 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 the
United States, which are located on federal lands, and such revision could
also impair the Company's ability to develop any mineral prospects that are
located on unpatented mining claims in the future.
Environmental Risks
- - -------------------
Mining is subject to potential risks and liabilities associated with
pollution of the environment and the disposal of waste products occurring as
22
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
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, Europe,
Russia and other republics of the former Soviet Union.
23
Year 2000 Impact
- - ----------------
The Year 2000 issue relates to equipment which contain hardware and/or
software programmed to read the year based on its last two digits. This
equipment will not be able to differentiate between years at the turn of the
century and, if this problem is left uncorrected, may result in malfunctions
of the equipment.
Throughout the Company, the use of computers is limited to Windows operating
systems on personal computers linked to Local Area Networks. Software
consists of standardized packages from major developers. The Year 2000
issue also relates to other office equipment, such as telephones, voice mail
and the office security system. The Company is in the process of contacting
all affected vendors and manufacturers to determine whether any updates or
replacements will be required. The cost of the project to date has not been
material and the Company does not expect future costs of the project to be
material. An entire system replacement of all computers and software would
total approximately $75,000. Many components have been certified as Year
2000 compliant. Those companies that provide banking, insurance and other
administrative services are also being contacted for Year 2000 compliance.
Item 3. LEGAL PROCEEDINGS
Goldstripe Project
- - ------------------
Following cessation of the Company's operations at Goldstripe, on August 5,
1992, the U.S. Forest Service notified the Company that it had determined to
initiate a response action at the 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 over several years, 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 under any other governmental regulation.
In August 1998, the U.S. 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
24
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.
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, 1998. 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, 1998.
25
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock of the Company is traded on the NASDAQ Stock Market's
National Market System, 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, 1996.
Sales Prices
------------------
High Low
Fiscal Year Closing Closing
- - ----------- ------- -------
1997:
First Quarter (July, Aug., Sept. - 1996) $14 1/2 $ 9 7/8
Second Quarter (Oct., Nov., Dec. - 1996) $14 1/8 $12
Third Quarter (Jan., Feb., March - 1997) $13 1/2 $10
Fourth Quarter (April, May, June - 1997) $10 3/4 $ 8 1/4
1998:
First Quarter (July, Aug., Sept. - 1997) $ 9 3/8 $ 7 1/4
Second Quarter (Oct., Nov., Dec. - 1997) $ 8 3/4 $ 4
Third Quarter (Jan., Feb., March - 1998) $ 6 $ 4 1/4
Fourth Quarter (April, May, June - 1998) $ 7 $ 4 1/2
As of August 30, 1998, there were approximately 1,082 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.
26
Item 6. SELECTED FINANCIAL DATA
For the Year Ended June 30,
-------------------------------------------
Selected Statement of 1998 1997 1996 1995 1994
Operations Data ---- ---- ---- ---- ----
(Amounts in thousands, except per share data)
Royalty income $ 2,176 $ 8,890 $ 3,680 $ 470 $ 153
Exploration expense 2,001 1,738 1,434 1,485 686
General and
administrative
expense 1,704 1,706 1,204 1,015 753
Earnings (loss) (3,543) 4,054 589 (2,025) (1,452)
Basic earnings
(loss) per share $ (0.21) $ 0.26 $ 0.04 $ (0.14) $ (0.11)
Diluted earnings
(loss) per share $ (0.21) $ 0.24 $ 0.04 $ (0.14) $ (0.11)
As of June 30,
--------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Selected Balance (Amounts in thousands)
Sheet Data
Total assets $20,927 $18,981 $14,063 $10,273 $ 8,183
Working capital 11,437 13,942 11,130 8,723 6,884
Long-term obligations 108 134 111 117 131
27
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
- - -------------------------------
At June 30, 1998, the Company had current assets of $12,208,000 compared to
current liabilities of $771,000 for a current ratio of 16 to 1. This
compares to current assets of $15,056,000 and current liabilities of
$1,114,000, at June 30, 1997, resulting in a current ratio of 14 to 1. The
Company's current assets include $3,008,000 of marketable securities that
consist of U.S. treasury securities with maturities of 12 months or less.
The Company also holds $2,012,000 of noncurrent marketable securities with
maturities of 17 to 20 months. The Company's initial cost of these
marketable securities was $5,019,000.
During fiscal 1998, liquidity needs were met from: (i) $2,176,000 in
revenues from production at the Crescent Pit and at Bald Mountain, (ii) the
Company's available cash resources, and interest and other income of
$786,000, (iii) the sale of substantially all of the Company's gold
inventory, (iv) private placement of $6,198,000, and (v) cash receipts from
the exercise of options and warrants of $346,000.
During the fiscal year, the Company spent $561,000 on development at the
Long Valley property.
The only material commitments of the Company that cannot be terminated at
the sole discretion of the Company are (i) employment agreements with four
officers, calling for minimum payments of approximately $385,000 through
January 1999; and (ii) office lease payments of $1,094,000 through the lease
period ending October 2005.
The Company anticipates total expenditures for fiscal 1999 for general and
administrative expenses to be approximately $2,000,000 and expenditures for
exploration and property holding costs to be approximately $2,000,000.
Development costs at Long Valley are anticipated to be $980,000 which
includes the $900,000 payment to Standard Industrial Minerals. Exploration
and holding cost expenditures include $400,000 for Alligator Ridge, $450,000
for Manhattan, $800,000 for the Milos Gold project, $50,000 for the Royal
High Desert joint venture, $60,000 for Union Pacific and $140,000 for
generative exploration. These amounts could increase or decrease
significantly, at any time during the fiscal 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.
28
Recently, spot gold prices have hit nineteen year lows and gold prices could
continue at these depressed prices. The Company's revenues at both South
Pipeline and Bald Mountain are directly affected by the gold price.
The Company's current financial resources and sources of income should be
adequate to cover the Company's anticipated expenditures for general and
administrative costs, exploration and leasehold expenses, and capital
expenditures for at least the next fiscal year.
Year 2000 Impact
- - ----------------
The Year 2000 issue relates to equipment which contain hardware and/or
software programmed to read the year based on its last two digits. This
equipment will not be able to differentiate between years at the turn of the
century, and if this problem is left uncorrected, may result in malfunctions
of the equipment.
Throughout the Company, the use of computers is limited to Windows operating
systems on personal computers linked to Local Area Networks. Software
consists of standardized packages from major developers. The Year 2000
issue also relates to other office equipment, such as telephones, voice mail
and the office security system. The Company is in the process of contacting
all affected vendors and manufacturers to determine whether any updates or
replacements will be required. The cost of the project to date has not been
material and the Company does not expect future costs of the project to be
material. An entire system replacement of all computers and software would
total approximately $75,000. Many components have been certified as Year
2000 compliant. Those companies that provide banking, insurance and other
administrative services are also being contacted for Year 2000 compliance.
RESULTS OF OPERATIONS
- - ---------------------
Fiscal Year Ended June 30, 1998 Compared with Fiscal Year Ended
- - ---------------------------------------------------------------
June 30, 1997
- - -------------
For the year ended June 30, 1998, the Company recorded a net loss of
$3,543,000, or $0.21 per diluted share, as compared to net income of
$4,055,000, or $0.24 per diluted share, for the year ended June 30, 1997.
The net loss for the current fiscal year reflects the completion of mining
at the Crescent Pit in fiscal 1997.
The Company received net profits interest royalty income from the Crescent
Pit of $1,605,000 relating to mill-grade material and $442,000 relating to
heap leach material. This was reduced by a realized loss on gold held in
inventory of $832,000 compared to a loss of $697,000 in fiscal 1997. As of
June 30, 1998, all of the Crescent Pit mill-grade material had been
processed. It is anticipated that ongoing heap leach production will
29
continue in fiscal 1999 at a comparable level to heap leach production in
fiscal 1998.
Costs of operations decreased compared to the prior year, which related to
the payment of Nevada Net Proceeds Tax associated with the decreased
production at the Crescent Pit, somewhat offset by increased costs of
monitoring the Company's 20% NPI at South Pipeline.
General and administrative expenses remained flat at $1,704,000, for the
year ended June 30, 1998, compared to $1,706,000 for the year ended June 30,
1997. General and administrative expenses consist primarily of employee
compensation and benefits, office lease expense, investor relations
expenses, office equipment expenses, travel and communication costs.
Exploration costs increased from $1,737,000 in fiscal 1997 to $2,001,000 in
fiscal 1998, due to expenditures at the Milos Gold project. Lease
maintenance and holding costs increased from $266,000 in fiscal 1997 to
$736,000 in fiscal 1998, primarily due to increased holding costs at
Buckhorn South and costs associated with the Manhattan project.
Interest and other income was $786,000 in fiscal 1998, up from $413,000 in
fiscal 1997, due primarily to increased funds available for investing.
Depreciation and amortization increased from $51,000 for fiscal 1997 to
$155,000 for fiscal 1998, primarily due to the depletion associated with the
Company's recently acquired Bald Mountain royalty.
Fiscal Year Ended June 30, 1997 Compared with Fiscal Year Ended
- - ---------------------------------------------------------------
June 30, 1996
- - -------------
For the year ended June 30, 1997, the Company recorded net income of
$4,055,000, or $0.26 per share, as compared to a net income of $589,000, or
$0.04 per share, for the year ended June 30, 1996. The net income for the
1997 fiscal year 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 $6,855,000 relating to mill-grade material and $1,580,000 relating to
heap leach material. This was reduced by an unrealized loss on gold held in
inventory, as of June 30, 1997, of $697,000. As of June 30, 1997, all of
the Crescent Pit mill-grade material had been processed.
Costs of operations increased over the prior year, which related to the
payment of Nevada Net Proceeds Tax associated with the increased production
at the Crescent Pit.
General and administrative expenses of $1,706,000, for the year ended June
30, 1997, increased from $1,204,000 for the year ended June 30, 1996, as a
30
result of increased employee compensation, the cost of listing on the NASDAQ
National Market System, increased investor relations expenses and increased
office expenses. General and administrative expenses consist primarily of
employee compensation and benefits, office lease expense, investor relations
expenses, office equipment expenses, travel and communication costs.
Exploration costs increased from $1,434,000 in fiscal 1996 to $1,737,000 in
fiscal 1997, due to expenditures at the Royal High Desert joint venture and
increased expenses related to analysis of potential gold royalty
acquisitions.
Lease maintenance and holding costs remained flat, at $266,000 in fiscal
1997 and $275,000 in fiscal 1996, as the Company maintained its level of
property holding costs.
Interest and other income was $413,000 in fiscal 1997, down from $442,000 in
fiscal 1996, due primarily to decreased funds available for investing.
Depreciation and amortization decreased from $229,000 for fiscal 1996 to
$51,000 for fiscal 1997, primarily due to the depletion associated with the
Company's capped net smelter return 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.
31
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ROYAL GOLD, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
REPORT OF INDEPENDENT ACCOUNTANTS 33
FINANCIAL STATEMENTS
Consolidated Balance Sheets 34
Consolidated Statements of Operations 36
Consolidated Statements of Stockholders' Equity 37
Consolidated Statements of Cash Flows 39
Notes to Consolidated Financial Statements 41
32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Royal Gold, Inc.:
In our opinion, the accompanying consolidated balance sheets and related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the consolidated financial
position of Royal Gold, Inc. and Subsidiaries as of June 30, 1998 and 1997
and the consolidated results of their operations and cash flows for each of
the three years in the period ended June 30, 1998, in conformity with
generally accepted accounting principles. 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, which 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 audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Denver, Colorado
September 25, 1998
33
ROYAL GOLD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of June 30, 1998 and 1997
ASSETS
1998 1997
----------- -----------
Current Assets
Cash and cash equivalents $ 8,462,083 $ 3,333,298
Marketable securities 3,007,505 4,995,370
Receivables
Trade and other 516,186 77,546
Royalties receivable in gold 83,194 2,542,975
Inventory 69,101 2,872,366
Prepaid expenses and other 70,065 599,091
Deferred income tax benefit,
net 0 635,000
----------- -----------
Total current assets $ 12,208,134 $ 15,055,646
----------- -----------
Property and equipment, at cost
Mineral properties 6,949,655 4,070,390
Furniture, equipment
and improvements 681,073 814,976
----------- -----------
7,630,728 4,885,366
Less accumulated depreciation
and depletion (981,625) (982,950)
----------- -----------
Net property and equipment 6,649,103 3,902,416
----------- -----------
Other Assets
Noncurrent marketable securities 2,012,500 0
Other 57,567 22,767
----------- -----------
Total other assets 2,070,067 22,767
----------- -----------
Total Assets $ 20,927,304 $ 18,980,829
=========== ===========
(continued)
34
ROYAL GOLD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
as of June 30, 1998 and 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
----------- -----------
Current Liabilities
Accounts payable $ 548,904 $ 961,059
Taxes payable 45,280 0
Accrued liabilities
Retirement benefits 26,400 26,400
Accrued compensation 140,000 100,000
Other 10,190 26,455
----------- -----------
Total current liabilities $ 770,774 $ 1,113,914
Retirement benefit liabilities 107,497 133,897
Commitments and contingencies
(Notes 2, 6 & 10)
Stockholders' equity
Common stock, $.01 par value, authorized
40,000,000 shares; and issued
17,069,602 and 15,877,202 shares,
respectively 170,696 158,772
Additional paid-in capital 53,978,827 47,447,397
Accumulated deficit (33,340,707) (29,797,978)
----------- -----------
20,808,816 17,808,191
Less treasury stock, at cost
(143,726 and 15,026 shares,
respectively) (759,783) (75,173)
----------- -----------
Total stockholders' equity 20,049,033 17,733,018
----------- -----------
Total liabilities and stockholders'
equity $ 20,927,304 $ 18,980,829
=========== ===========
The accompanying notes are an integral
part of these consolidated financial statements.
35
ROYAL GOLD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended June 30, 1998, 1997 and 1996
1998 1997 1996
----------- ---------- ---------
Royalty income $ 2,175,786 $ 8,899,537 $3,680,145
Loss on gold inventory (831,510) (697,488) 0
Consulting revenue 31,691 18,585 31,544
Costs and expenses
Costs of operations 367,010 645,627 371,777
Direct costs of consulting 6,786 5,796 13,215
General and administrative 1,704,108 1,705,649 1,203,846
Exploration 2,001,118 1,737,798 1,434,264
Lease maintenance and
holding costs 736,457 266,245 274,864
Depreciation and depletion 155,296 50,953 228,936
----------- ---------- ---------
Total costs and expenses 4,970,775 4,412,068 3,526,902
----------- ---------- ---------
Operating income (loss) (3,594,808) 3,808,566 184,787
Interest and other income 786,090 412,523 441,728
Loss on marketable securities (53,731) (23,895) (37,320)
Interest and other expense 0 (27,670) 0
----------- ---------- ---------
Income (loss) before income taxes (2,862,449) 4,169,524 589,195
----------- ---------- ---------
Income tax expense (680,280) (115,000) 0
----------- ---------- ---------
Net earnings (loss) $ (3,542,729)$ 4,054,524 $ 589,195
=========== ========== =========
Basic earnings (loss) per share $ (0.21)$ 0.26 $ 0.04
=========== ========== =========
Basic weighted average shares
outstanding 16,617,133 15,615,729 14,868,109
Diluted earnings (loss) per share $ (0.21)$ 0.24 $ 0.04
=========== ========== =========
Diluted weighted average
shares outstanding 16,617,133 16,568,360 16,363,988
The accompanying notes are an integral
part of these consolidated financial statements.
36
ROYAL GOLD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended June 30, 1998, 1997 and 1996
Additional
Common Stock Paid-In
Shares Amount Capital
---------- --------- ----------
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
---------- --------- ----------
Issuance of common stock for:
Exercise of options 168,550 1,685 110,414
Exercise of warrants 230,500 2,305 127,820
Issuance of treasury shares
for lease bonus payment 8,520
Net income for the year
ended June 30, 1997
---------- --------- ----------
Balance, June 30, 1997 15,877,202 $ 158,772 $47,447,397
---------- --------- ----------
Issuance of common stock for:
Exercise of options 189,400 1,894 39,187
Exercise of warrants 203,000 2,030 302,470
Private placement 800,000 8,000 6,189,773
Purchases of common stock
Net loss for the year
ended June 30, 1998
---------- --------- ----------
Balance, June 30, 1998 17,069,602 $ 170,696 $53,978,827
========== ========= ==========
(continued)
37
ROYAL GOLD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, Continued
for the years ended June 30, 1998, 1997 and 1996
Total
Stock-
Accumulated Treasury Stock holders'
Deficit Shares Amount Equity
----------- ------- -------- ----------
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
----------- ------- -------- ----------
Issuance of common stock for:
Exercise of options - - - 112,099
Exercise of warrants - - - 130,125
Issuance of treasury shares
for lease bonus payment - (960) 4,800 13,320
Net income for the year
ended June 30, 1997 $ 4,054,524 - - $ 4,054,524
----------- ------- -------- ----------
Balance, June 30, 1997 $(29,797,978) 15,026 $ (75,173)$17,733,018
----------- ------- -------- ----------
Issuance of common stock for:
Exercise of options - - - 41,081
Exercise of warrants - - - 304,500
Private placement - - - 6,197,773
Purchases of common stock - 128,700 (684,610) (684,610)
Net loss for the year
ended June 30, 1998 $ (3,542,729) - $ - $(3,542,729)
----------- ------- -------- ----------
Balance, June 30, 1998 $(33,340,707) 143,726 $(759,783)$20,049,033
=========== ======= ======== ==========
The accompanying notes are an integral
part of these consolidated financial statements.
38
ROYAL GOLD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended June 30, 1998, 1997 and 1996
1998 1997 1996
Cash flows from operating activities
Net income (loss) $(3,542,729) 4,054,524 $ 589,195
---------- ---------- ----------
Adjustments to reconcile
net income (loss) to net
cash provided by(used in)
operating activities:
Depreciation, depletion and
amortization 155,296 50,953 228,936
Loss on marketable
securities 53,731 23,895 37,320
Non cash exploration expense 0 13,320 0
Deferred taxes 635,000 115,000 0
(Increase) decrease in:
Marketable securities (78,366) (4,265) (40,750)
Trade and other receivables (438,640) 258,616 (128,478)
Royalties receivable in gold 2,459,781 (905,402) (1,608,738)
Inventory 2,803,265 (1,666,960) (1,051,168)
Prepaid expenses and other 529,026 (467,373) (41,811)
Increase (decrease) in:
Accounts payable and
accrued liabilities (343,140) 584,385 311,052
Retirement benefit liabilities (26,400) 23,348 (6,400)
---------- ---------- ----------
Total adjustments 5,749,553 (1,974,483) (2,300,037)
Net cash provided by (used in)
operating activities $ 2,206,824$ 2,080,041 $(1,710,842)
---------- ---------- ----------
(continued)
39
ROYAL GOLD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS CASH FLOWS, Continued
for the years ended June 30, 1998, 1997 and 1996
1998 1997 1996
---------- ---------- ----------
Cash flows from investing activities
Capital expenditures for
property and equipment $(2,901,983) $(2,297,259)$(1,300,853)
(Increase) decrease in
other assets (34,800) 0 0
---------- ---------- ----------
Net cash used in
investing activities $(2,936,783) $(2,297,259)$(1,300,853)
---------- ---------- ----------
Cash flows from financing activities
Purchase of common stock (684,610) 0 0
Proceeds from issuance of
common stock 6,543,354 242,224 2,895,893
---------- ---------- ----------
Net cash provided by
financing activities 5,858,744 242,224 2,895,893
---------- ---------- ----------
Net increase (decrease) in cash
and equivalents 5,128,785 25,006 (115,802)
---------- ---------- ----------
Cash and equivalents at beginning
of period 3,333,298 3,308,292 3,424,094
---------- ---------- ----------
Cash and equivalents at
end of period $ 8,462,083 $ 3,333,298 $ 3,308,292
========== ========== ==========
Supplemental Information:
The Company paid federal income taxes of $57,500 in fiscal 1998.
In fiscal 1997, 960 shares of treasury stock were issued for lease bonus
payments.
The accompanying notes are an integral
part of these consolidated financial statements.
40
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 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 in 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.
Year 2000 Impact
The Year 2000 issue relates to equipment which contain hardware and/or
software programmed to read the year based on its last two digits.
This equipment will not be able to differentiate between years at the
turn of the century, and if this problem is left uncorrected, may
result in malfunctions of the equipment.
Throughout the Company, the use of computers is limited to Windows
operating systems on personal computers linked to Local Area Networks.
Software consists of standardized packages from major developers. The
Year 2000 issue also relates to other office equipment, such as
telephones, voice mail and the office security system. The Company is
in the process of contacting all affected vendors and manufacturers to
determine whether any updates or replacements will be required. The
cost of the project to date has not been material and the Company does
not expect future costs of the project to be material. An entire
system replacement of all computers and software would total
approximately $75,000. Many components have been certified as Year
2000 compliant. Those companies that provide banking, insurance and
other administrative services are also being contacted for Year 2000
compliance.
Summary of Significant Accounting Policies:
Use of Estimates:
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.
41
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, 1998, the Company
held $400,000 of U.S. government securities under an agreement to
resell in July 1998. 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 safekeeping account by FBS Investments
Services, Inc. At June 30, 1998, cash equivalents included
approximately $6,232,000 of temporary cash investments in an uninsured
government securities money market fund.
Marketable securities:
Effective July 1, 1998, the Company has reclassified marketable
securities to held-to-maturity. These securities will be recorded at
market value, which approximates the amortized cost basis. At June 30,
1998, the Company held U.S. treasury securities in a principal amount
of $5,000,000. The Company acquired these securities, with maturities
ranging from November 1998 to November 1999, at a cost of $5,018,906.
Any premium or discount is amortized over the remaining life of the
security. At June 30, 1998, the market value of these securities was
$5,020,005. Included in the statement of operations is the net change
in unrealized gains for the trading securities of $8,494 and $4,198 for
the years ended June 30, 1998 and 1997, respectively.
Royalties Receivable in Gold:
Royalties receivable consists of gold held by Cortez, the operator of
the South Pipeline Project, prior to making in-kind royalty payments.
These quarterly, in-kind royalty payments are received one month and
one day after the relevant production quarter. At June 30, 1998, there
was 278 ounces of gold related to the June 30 quarterly production
recorded as a receivable valued at current market value. This gold was
received on August 1, 1998. Royal Gold has exposure for any changes in
gold price on this receivable between the end of the quarter and the
time of receipt.
42
Gold Inventory:
Gold inventory on the balance sheet consists of refined gold bullion
held in uninsured accounts. This gold is stored 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, 1998, the Company held 150 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 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 undiscounted cash flows.
Management's estimate of the 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 15 years for office
furniture, 3 years for computer equipment, and 5 years for other office
equipment, using the straight-line method. The cost of normal
43
maintenance and repairs is charged to expenses 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.
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.
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.
Earnings (Loss) Per Share:
Basic earnings (loss) per share is computed by dividing the net income
or loss by the weighted average number of common shares outstanding
during each year. Diluted earnings per share reflects the effect of
dilutive options and warrants.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share ("SFAS 128"),effective for
periods ending after December 15, 1997, which the Company adopted
December 31, 1997, and applied retroactively for all periods presented.
New accounting pronouncements:
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 (" SFAS 130"), Comprehensive
Income, which is effective for periods beginning after December 15,
1997. SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components in financial statements.
Comprehensive income generally represents all changes in shareholders'
equity except those resulting from investments by or distributions to
shareholders. Management is currently evaluating the requirements of
SFAS 130.
In June, 1997, American Institute of Certified Public Accountants
issued Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information".
This statement establishes standards for the way that public businesses
report information about operating segments in annual financial
44
statements and requires that those enterprises report selected
information about operating segments in interim financial reports
issued to shareholders. It also standards for related disclosures
about products and services, geographic areas, and major customers.
This statement is effective for financial statements for periods
ending after December 15, 1997, and adoption of the statement is not
anticipated to have a material impact on the Company's financial
position, results of operations, liquidity or current disclosures.
2. Property and Equipment
The net carrying value of the Company's property and equipment consists
of the following components at June 30, 1998 and 1997:
1998 1997
--------- ---------
Mineral Properties:
South Pipeline-
Net Profits Interest $ - $ -
Long Valley 4,086,233 3,675,281
Bald Mountain 2,369,353 -
Camp Bird 120,110 120,110
6,575,696 3,795,391
--------- ---------
Office furniture, equipment
and improvements 73,407 107,025
--------- ---------
Net property and equipment $6,649,103 $3,902,416
========= =========
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 Company owns a 20% royalty interest in the South Pipeline Project, a
sediment-hosted gold deposit located in Lander County, Nevada, which
covers over 4,000 acres of unpatented mining claims. The South Pipeline
45
Project is operated by Cortez Gold Mines ("Cortez"), a joint venture of
Placer Dome U.S. Inc. ("PDUS") and Kennecott Corporation.
Under a royalty interest 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, a net
smelter returns ("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.
Under either royalty arrangement, the Company may elect to take its
royalty "in-kind."
The Company receives advance royalty payments of $150,000 per year for
the life of the project, 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 built or to be built for the Pipeline project.
B. Bald Mountain Royalty
---------------------
The Company purchased a 50% undivided interest in a sliding-scale net
smelter returns royalty that burdens approximately 81% of the Bald
Mountain Mine, White Pine County, Nevada, Bald Mountain is an open pit,
heap leach mine that is operated by Placer Dome U.S. Inc.
The Company purchased the royalty, effective January 1, 1998, for a cash
consideration of $2,250,000 and assumption of $218,312 in debt to the
operator. One-half of each quarterly royalty payment is being withheld
by the operator until this debt is paid in full.
C. 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").
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 were paid through 1996.
46
The Company conducted substantial drilling programs at Long Valley in
fiscal years 1995, 1996, 1997, and 1998, and discovered additional
deposits of gold mineralization.
Based on the results of the drilling, the Company determined that proven
and probable reserves existed at the Long Valley property as of July 1,
1995.
In August 1997, the Company entered into an agreement with Amax Gold Inc.
This agreement provided that Amax Gold had an option, exercisable through
December 31, 1997, to enter into a lease and become responsible for
further exploration, permitting, and development of Long Valley, and for
construction and operation of any mine that would have been developed.
If Amax Gold had exercised its option, it would have then paid $300,000
to Royal Gold and made advance minimum royalty payments of $250,000 per
year to Royal Gold until the Long Valley property was in production.
In November 1997, Amax Gold, Inc. terminated its option to explore the
Long Valley Project and relinquished any interest in the property.
In December 1997, Royal Gold announced that it had secured, for $100,000,
a one-year extension of its option to acquire all of the interest of
Standard Industrial Minerals, Inc. in the Long Valley Gold project.
Under the terms of the extension, Royal Gold is required to pay $900,000
to Standard Industrial Minerals by December 31, 1998, or else forfeit the
right to acquire all of Standard Industrial's interest in the Long Valley
project.
The Company now controls 100% of the Long Valley property, subject to a
property payment of $900,000. Management believes that it will be able
to farm-out this property and receive a royalty interest, and recoup all
of its invested costs. The development of the Long Valley property is
dependent on the gold price, and is less profitable at lower gold prices.
The Long Valley project is marginally profitable at current gold prices.
A further decline in gold price could result in an impairment of the Long
Valley project.
C. Camp Bird Mine
--------------
The Camp Bird 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, 1998, 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.
47
3. Earnings per share ("EPS") computation
For the twelve months ended June 30, 1998
Income(Loss) Shares Per-Share
(Numerator) (Denominator) Amount
---------- ------------- ---------
Basic EPS
Income available to
common stockholders $(3,542,729) 16,617,133 $ (0.21)
Effect of
dilutive securities 0
---------- ---------- -------
Diluted EPS $(3,542,729) 16,617,133 $ (0.21)
========== ========== =======
Options to purchase 609,520 shares of common stock at an average purchase
price of $0.35 per share were not included in the computation of diluted
EPS because the Company experienced a net loss in the twelve month period
and these options were antidilutive. Options to purchase 703,498 shares
of common stock, at an average price of $6.39 per share, were outstanding
at June 30, 1998, but were not included in the computation of diluted EPS
because the exercise price of these options were greater than the average
market price of the common shares.
For the twelve months ended June 30, 1997
Income(Loss) Shares Per-Share
(Numerator) (Denominator) Amount
---------- ---------- -------
Basic EPS
Income available to
common stockholders $4,054,524 15,615,729 $ 0.26
Effect of
dilutive securities
Options 785,455
Warrants 167,176
---------- ---------- -------
Diluted EPS $4,054,524 16,568,360 $ 0.24
========== ========== =======
Options to purchase 214,000 shares of common stock, at an average price
of $13.89 per share, were outstanding at June 30, 1997, but were not
included in the computation of diluted EPS because the exercise price of
these options were greater than the average market price of the common
shares.
48
For the twelve months ended June 30, 1996
Income(Loss) Shares Per-Share
(Numerator) (Denominator) Amount
---------- ---------- -------
Basic EPS
Income available to
common stockholders $ 589,195 14,868,109 $ 0.04
Effect of
dilutive securities
Options 1,095,725
Warrants 400,154
---------- ---------- -------
Diluted EPS $ 589,195 16,363,988 $ 0.04
========== ========== =======
4. 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, 1998, the liability of $133,897 represents the net present value
of estimated future payments to this former officer, adjusted for
payments made to date.
5. 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, 1998 and 1997, are as follows:
1998 1997
---------- ----------
Net operating loss carryforwards $ 7,969,998 $ 8,994,000
Mineral property basis 966,038 265,000
AMT credit carryforward 99,172 -
Loss on sale of gold 291,029 -
Other 232,946 235,000
---------- ----------
Total gross deferred tax assets 9,559,183 9,494,000
Valuation allowance (8,063,920) (6,354,000)
---------- ----------
Net deferred tax assets 1,495,263 3,140,000
---------- ----------
Gold inventory (213,026) (1,918,000)
Mineral property basis (1,097,872) (576,000)
Other (184,366) (11,000)
---------- ----------
Total deferred tax liabilities (1,495,263) (2,505,000)
---------- ----------
Total net deferred taxes $ - $ 635,000
========== ==========
49
At June 30, 1998, the Company has approximately $22.8 million of net
operating loss carryforwards which, if unused, will expire during the
years 2001 through 2016. 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. Due to the uncertainty of future
production and the Company's expected future losses, a full valuation
allowance has been established for the deferred tax assets at June 30,
1998.
The components of income tax expense (benefit) for the years ended June
30, 1998, 1997 and 1996, are as follows:
1998 1997 1996
-------- -------- --------
Current federal tax expense $ 680,280 $ - $ -
Deferred tax expense(benefit) - 935,000 136,000
Increase (decrease) in
deferred tax asset
valuation allowance - (820,000) (136,000)
-------- -------- --------
$ 680,280 $ 115,000 $ -
======== ======== ========
The provision for income taxes for the years ended June 30, 1998, 1997
and 1996, 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:
1998 1997 1996
-------- -------- --------
Total expense(benefit)
computed by applying
statutory rate $(1,001,857) $ 1,418,000 $ 200,000
Adjustments of valuation
allowance 1,853,461 (1,310,000) (227,000)
Excess depletion (156,865) - -
Other (14,459) 7,000 27,000
-------- -------- --------
$ 680,280 $ 115,000 $ -
======== ======== ========
The change in the valuation allowance in fiscal 1998 is related to
establishing a valuation allowance for the current year net operating
losses.
Included in the fiscal 1997 adjustments of valuation allowance is
$820,000 related to fiscal 1997 and $490,000 related to fiscal 1996
caused by changes in fiscal 1996 taxable temporary differences.
50
Included in the fiscal 1996 adjustments of valuation allowance is
$136,000 related to fiscal 1996 and $91,000 related to fiscal 1995 caused
by changes in fiscal 1995 temporary differences.
6. Commitments
Operating Lease
The Company leases office space under a lease agreement which expires
October 31, 2005. Future minimum cash rental payments are as follows:
Years ending June 30,
---------------------------
1999 $ 140,858
2000 $ 158,473
2001 $ 171,741
2002 $ 178,629
2003 $ 185,812
2004 $ 193,290
2005 $ 65,272
---------
$1,094,075
=========
Rent expense charged to operations for the years ended June 30, 1998,
1997, and 1996, amounted to $135,838, $122,300 and $143,300,
respectively. The Company subleased a portion of its premises on a
month-to-month basis during the stated period.
In order for the Company to maintain its current exploration and
development properties through fiscal 1999, the Company would incur
lease maintenance and holding costs of $1,200,000, which includes the
$900,000 payment at the Long Valley property. 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,
1998, of $385,000 through January 1999. 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.
51
7. Stockholders' Equity
Preferred Stock:
The Company has 10,000,000 authorized and unissued shares of $.01 par
value Preferred Stock.
Private Placements:
During fiscal 1996, warrants to purchase a total of 974,000 shares
were exercised, providing proceeds to the Company of $2,864,000.
During fiscal 1997, warrants to purchase a total of 230,500 shares
were exercised, providing proceeds to the Company of $130,125.
During fiscal 1998, the Company sold 800,000 shares of common stock,
to an institutional investor in Canada, resulting in a net proceeds of
$6,200,000. The proceeds of this offering will be used to advance the
Company's royalty acquisition program, exploration activities, and for
general corporate purposes.
Also during fiscal 1998, the Company repurchased 128,700 shares of
common stock at an average cost of $5.32 per share. This buyback was
in accordance with the Company's stock repurchase program announced
May 2, 1997, in which the Board of Directors authorized the repurchase
of up to $5 million of the Company's common stock, from time-to-time,
in the open market or in privately negotiated transactions.
On September 10, 1997, the Company's board of directors adopted a
stockholders' rights plan in which preferred stock purchase rights
("Rights") were distributed as a dividend at the rate of one Right for
each share of common stock held as of close of business on September
11, 1997. The terms of the Rights plan provide that if any person or
group were to announce an intention to acquire or were to acquire 15
percent or more of the Company's outstanding common stock, then the
owners of each share of common stock (other than the acquiring person
or group) would become entitled to exercise a right to buy one one-
hundredth of a newly issued share of Series A Junior Participating
Preferred Stock of the Company at an exercise price of $50 per Right.
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 in the Directors' plan. 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
52
1996, no options were exercised. Additionally, options for an
additional 30,000 shares were issued during the year.
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.
In December 1996, shareholders approved the adoption of an Equity
Incentive Plan to replace the Directors' and Employees' Stock Option
Plans. A total of 800,000 shares of the Company's common stock have
been reserved for issuance under the new Plan. The options are
exercisable at prices equal to the market value of the Company's
common stock as of the date of grant, vest in one year from date of
grant, and expire ten years after the date of grant. There have been
no stock appreciation rights granted under either the Employee Plan or
the Equity Incentive Plan. During fiscal 1998, options were exercised
for 189,400 shares for a total of $41,081 in proceeds to the Company.
The following schedules detail activity related to options and
warrants for the years ended June 30, 1996, 1997 and 1998:
Optioned Average
Shares Option Prices
--------- -------------
Options Outstanding, June 30, 1995 1,211,970 $ 1.85
Granted 191,000 $ 8.50
Exercised (11,190) $ 3.25
Surrendered or expired (1,810) $ 7.88
---------
Options Outstanding, June 30, 1996 1,389,970 $ 2.75
---------
Granted 204,000 $14.13
Exercised (168,550) $ 0.67
---------
Options Outstanding, June 30, 1997 1,425,420 $ 4.63
---------
Granted 804,998 $ 6.38
Exercised (189,400) $ 0.22
Surrendered or expired (728,000) $ 9.59
---------
Options Outstanding, June 30, 1998 1,313,018 $ 3.59
=========
All options outstanding at each year end, except for current year grants,
are exercisable. Options outstanding at June 30, 1998, consist of: 574,520
options at a strike price of $0.125 and a remaining contractual life of 3.4
years; 587,498 options at an average strike price of $5.31 (a range of $4.00
to $5.63), and a weighted average remaining contractual life of 6.0 years;
and 151,000 options at an average strike price of $10.06 (a range of $7.88
to $14.13), and a weighted average remaining contractual life of 3.7 years.
53
Warranted Average
Shares Warrant Prices
--------- --------------
Warrants Outstanding, June 30, 1995 1,407,500 $ 2.35
Exercised (974,000) $ 2.95
---------
Warrants Outstanding, June 30, 1996 433,500 $ 1.00
---------
Exercised (230,500) $ 0.56
Warrants Outstanding, June 30, 1997 203,000 $ 1.50
---------
Exercised (203,000) $ 1.50
---------
Warrants Outstanding, June 30, 1998 0 $ 0.00
=========
The shares and exercise prices listed above are generally subject to
adjustment in accordance with antidilution provisions of each of the
warrant agreements.
In October 1997, stock options were awarded to certain employees at
the then current market price.
On May 29, 1998, the Board of Directors approved the implementation of
a Stock Option Exchange Program for current employees of Royal Gold.
In effect, the Exchange Program will give employees a period of time
to exchange their options for a lesser number of new options with an
exercise price based on the closing price of the stock on May 29, 1998
($5.375/share). Under this Exchange Program, 715,750 options will be
canceled and 522,498 new options will be issued. The new options will
not be exercisable for six months from the date of grant. The vesting
of the new options will be the same as for the old options. At June 30,
1998, no options had been exchanged.
The new number of options which were offered to each employee were
computed in reliance on the Black-Scholes Model. The net result of
applying this model is that the exercise price for the options will be
lower, and the number of shares subject to each such option was
reduced.
The Company measures compensation cost as prescribed by APB Opinion
No. 25 ("APB 25"), Accounting for Stock Issued to Employees. No
compensation cost has been recognized in the financial statements as
the exercise price of all options grants is equal to the market price
of the Company's common stock at the date of grant. In October 1995,
the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"). SFAS defines a
"fair value" based method of accounting for employee options or
similar equity instruments. Had compensation cost been determined
54
under the provisions of SFAS 123, the following pro forma net income
(loss) and per share amounts would have been recorded.
1998 1997
---------- ---------
Net income (loss)
As reported $(3,542,729) $4,054,503
Pro Forma $(4,232,401) $3,187,290
Net income (loss) per basic share
As reported $ (0.21) $ 0.26
Pro Forma $ (0.25) $ 0.20
Net income (loss) per diluted share
As reported $ (0.21) $ 0.24
Pro Forma $ (0.25) $ 0.19
The pro forma amounts were determined using the Black-Scholes model
with the following assumptions:
1998 1997
------ ------
Weighted average
expected volatility 64.4% 53.2%
Weighted average
expected option term 3.8 years 4.8 years
Weighted average
risk-free interest rate 5.5% 6.2%
Forfeiture rate 5% 5%
Weighted average grant
date fair value $2.28 $4.25
Preferred Stock Purchase Rights:
On September 10, 1997, the Company's board of directors adopted a
Stockholders' Rights Plan in which preferred stock purchase rights
("Rights") were distributed as a dividend at the rate of one Right for
each share of common stock held as of the close of business on
September 11, 1997. The terms of the Rights plan provide that if any
person or group were to announce an intention to acquire or were to
acquire 15 percent or more of the Company's outstanding common stock,
then the owners of each share of common stock (other than the
acquiring person or group) would become entitled to exercise a right
to buy one one-hundredth of a newly issued share of Series A Junior
Participating Preferred Stock of the Company at an exercise price of
$50 per Right.
55
8. Major Customers
In each of fiscal years 1998, 1997, and 1996, $2,047,142, $8,202,049
and $3,680,145, respectively, of the Company's royalty income was
received from the same source. (See Note 2.A.)
9. 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 also chooses 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. The
Company contributed $75,510, $67,041 and $59,157, in fiscal years
1998, 1997, and 1996, respectively.
10. 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.
56
PART III
Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Stanley Dempsey
- - ---------------
Age 59, Director Since August 1984; Term Expires 2000
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 67; Director Since May 1987; Term Expires 1999
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 71; Director Since August 1988; Term Expires 2000
Director. Executive Director of the Denver Gold Group. Vice Chairman 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, Qualchem,
Inc. and Behre Dolbear. (2) (3)
James W. Stuckert
- - -----------------
Age 60; 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., Thomas Transportation, Inc. and a Board
Member of the Security Industries Association. (2) (3)
Pierre Gousseland
- - -----------------
Age 76; Director Since June 1992; Term Expires 1998
Director. Financial Consultant. Mr. Gousseland is Chairman of the Board of
Directors of Golden Star Resources Ltd. and a director of Guyanor
Ressources, S.A. From 1977 until January 1986, 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)
57
S. Oden Howell, Jr.
- - -------------------
Age 58; Director Since December 1992; Term Expires 1999
Director. Consultant to 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.
Merritt Marcus
- - --------------
Age 64; 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, L.L.C., a
manufacturer of industrial powder coatings. Mr. Marcus has served several
terms as a Director of the National Paint and Coatings Association.
Peter B. Babin
- - --------------
Age 44; Director Since December 1997; Term Expires 2000
Director. President of the Company since December 1996, formerly Executive
Vice President from July 1995 through December 1996 and Senior Vice
President from July 1993 through June 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.
Thomas A. Loucks: Age 49
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.
Karen P. Gross: Age 44
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.
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 November
17, 1998 in Denver, Colorado.
58
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, 8-A, S-1 and S-8, and are incorporated
herein by reference.
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.
59
Exhibit
Number
-------
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.
(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 "Ferber" 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.
60
Exhibit
Number
-------
10 (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 - Exhibit 10(k) to the Company's
Form 10-K for the year ended June 30, 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 - Exhibit 10(l) to the Company's
Form 10-K for the year ended June 30, 1996.
(m) Consent of Independent Accountants - Exhibit 10(m) to the
Company's Form 10-K for the year ended June 30, 1996.
(n) Consent of Independent Accountants - Exhibit 10(n) to the
Company's Form 10-K for the year ended June 30, 1996.
(o) Shareholders' Rights Agreement Exhibit B to the Company's Form 8-
A dated September 11, 1997.
(p) Restated Option Agreement and Grant of Exploration Rights between
Union Pacific Minerals, Inc. and Royal Gold, Inc. dated effective
August 22, 1997.
(q) Letter agreement among Royal Gold, Inc. and Amax Gold Inc. -
Lease and Option to Purchase dated effective August 1, 1997.
(r)* Mining Lease and Option to Purchase Agreement between New Concept
Mining Inc. and Royal Gold, Inc. dated effective November 21,
1997.
(s)* Private Agreement between Rakov Pty. Ltd., Silver and Baryte Ores
Mining Co. S.A., and Royal Gold, Inc., dated effective March 30,
1998.
(t)* Private Agreement between Rakov Pty. Ltd. And Royal Gold, Inc.
dated effective March 28, 1998.
(u)* Exploration , Development and Mine Operating Agreement between
Battle Mountain Exploration Company and Royal Gold, Inc. dated
effective June 30, 1998.
(v)* Exploration and Development Option Agreement between Placer Dome
U.S., Inc. and Royal Gold, Inc. dated effective July 1, 1998.
21*(a) The Company and Its Subsidiaries.
* - Filed herewith.
(b) Reports on Form 8-K:
1. None.
61
EXHIBIT A
ROYAL GOLD, INC. AND SUBSIDIARIES
Denver Mining Finance Company (1)
Royal Trading Company (1)
Calgom Mining, Inc. (1)(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)
SOMIN LTD (5)
Royal Gold Australia (3)
Milos Gold S.A. (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.
(5) Owned 25% by Royal Gold, Inc.
62
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 28, 1998 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 28, 1998 By: /s/Stanley Dempsey
------------------
Stanley Dempsey, Chairman,
Chief Executive Officer, and Director
Date: September 28, 1998 By: /s/Thomas A. Loucks
-------------------
Thomas A. Loucks,
Treasurer
Date: September 28, 1998 By: /s/John Skadow
--------------
John Skadow
Controller
Date: September 28, 1998 By: /s/Edwin W. Peiker, Jr.
-----------------------
Edwin W. Peiker, Jr.,
Director
Date: September 28, 1998 By: /s/John W. Goth
---------------
John W. Goth,
Director
63
Date: September 28, 1998 By: /s/James W. Stuckert
--------------------
James W. Stuckert,
Director
Date: September 28, 1998 By: /s/Pierre Gousseland
--------------------
Pierre Gousseland,
Director
Date: September 28, 1998 By: /s/Merritt E. Marcus
--------------------
Merritt E. Marcus
Director
Date: September 28, 1998 By: /s/S. Oden Howell, Jr.
----------------------
S. Oden Howell, Jr.
Director
Date: September 28, 1998 By: /s/Peter B. Babin
-----------------
Peter B. Babin
Director
64