Royal Gold Has 27% Implied Return, Canaccord Says In Upgrade

Mining company Royal Gold, Inc (USA) RGLD reported fiscal year 2018 second quarter earnings per share that was broadly in line with the consensus estimate.

The Analyst

Canaccord Genuity analyst Tony Lesiak upgraded Royal Gold from Hold to Buy and increased his price target from $101 to $102, suggesting roughly 27 percent upside potential.

The price target revision was attributed to the positive impact of the new Tax Reform law and the revised assumptions for Mt. Milligan.

The Thesis

On the sales front, weaker-than-expected stream contribution from Rainy River was offset by better-than-expected royalty income from Cortez, Lesiak said in a note.

Following the resolution of the longer-term water issues, the company said operator Centerra expects operations at Mt. Milligan to be back at full capacity in April, the analyst said. However, the analyst said issues other than water also plague this key asset, which accounted for 27 percent of Royal Gold NAV, preventing it from reaching full production in the past.

Citing these lingering concerns, Lesiak remains cautious. The firm now expects Mt. Milligan to operate at 72 percent capacity in the second quarter, at 84 percent in Q3 and at 92 percent in Q4, with sales lagging production, given the typical five-month shipping and revenue recognition lag.

The firm said the reduction in the U.S. corporate tax rate from 35 percent to 21 percent will improve future financial results, while it expects the repatriation tax holiday to provide cash flows for growth.

The Price Action

Shares of Royal Gold are up about 19 percent over the past year.

Reacting to the results, shares were up 3 percent to $83.24.

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