2009 august rgld contrarian comprehensive

8/2/2019 2009 August RGLD Contrarian Comprehensive

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Contrarian Research ReportAugust 6, 2009

This report is based on information available to the public; no representation is made with regard to its accuracy or completeness. This document is neither an offer nor a solicitation to buy osell securities. All expressions of opinion reflect judgment at this date and are subject to change. Horizon ResearchGroup and others associated with it may have positions in securities o

companies mentioned. Reproduction of this report is strictly prohibited. Horizon Research Group, 2009.

Royal Gold, Inc.(BUY)

Price: $41.48 Ticker: RGLD52-wk. range: $49.81 - $22.75 Dividend: $0.32Shares out.: 40.7 million Yield: 0.80%Market Cap.: $1.7 Billion

Horizon Research Group

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The Contrarian Research Report

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Investment Thesis

Royal Gold is not a gold miner; it is a purchaser of interests in the gold mines of other goldminers. As such, it receives income streams from its royalty interests in gold (and silver)mines. Essentially, the company buys a share of production at the discounted present valueof the cash flow over the life of the mine which, in many cases, exists over decades. RoyalGold has invested in mines located in the US, Canada, Mexico, Chile, Argentina, Bolivia,Nicaragua, and West Africa. Also, much like a venture capital company, Royal Goldsinterests can be found in a wide spectrum of mines, from well-established mines that haveresources, reserves and actually produce gold to more speculative investments in minesthat have no proven reserves, just resources. Presumably, the newer mines will reachproduction at some point in the future and, thereby, offset depletion experienced in themore mature mines and result in substantial revenue and resource growth for the company.

Royal Gold now has 26 royalty streams, 8 development properties and 25 evaluationproperties. Its pipeline is solid, including a royalty on the large Pensasquito mine ofGoldcorp which, when it ramps up production in 2012, should add approximately 25% toRoyals revenues.

Mining companies benefit from the royalty model by getting to raise capital without sellingequity, and that capital can be used immediately to explore or develop a mining property,while Royal Gold avoids operating expense, capital expenditure requirements, capital callsor environmental liabilities. Royalties can continue for the life of the mine, which for someof Royal Golds most significant sources of royalty revenue are 25 years or longer. As aresult, what Royal Gold receives is strong cash flow and high profit margins, particularly

when the price of gold is climbing.

Royal Golds revenues from its existing mines currently account for approximately $70million per annum. However, as the new mines enter the production phase from thedevelopment and construction phase, Royal Gold expects to receive additional revenues ofapproximately $60 million per year over the next 1.5 years. There will be some depletionat the existing mines, though, so the total revenues going forward should be slightly lessthan the sum of these numbers.

The credit crisis has actually helped Royal Gold to strike some very favorable deals in thepast year. Until recently, more diversified base metal companies generally did not need

outside capital, as metal prices were high and their cash flow was strong. The credit crisismeant that these companies were generally cut off from the capital markets and the plungein some metal prices, such as copper, significantly reduced their cash flow, and some of themost leveraged mining companies got into trouble. Consequently, Royal Gold has beenable to purchase significant gold royalties in the past year at favorable prices (highdiscount rates), such as a royalty package from Barrick Gold and, more recently, a royaltyinterest in the Andacollo mine from Teck Resources. The Barrick package includesapproximately 70 royalties. Even before these acquisitions, Royal Gold had a solid long-


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term growth record, both in terms of royalties and revenues. These investments will likelybenefit the company over the next 20 years.

Royal Gold can be considered to be a finance company, as the relative mix of revenue andgross profit interests endow it with some of the characteristics of a general partner in ahedge fund. That is, 1) its earnings are leveraged by the investments of the primaryinvestors, which are orders of magnitude larger than its own (Royal Golds interest istypically only a few percent in each mine), and 2) so long as a mine is active, the companyreceives an ongoing revenue participation, analogous to a base fee on a hedge fund(regardless of mine profitability), as well as a profit participation in the event of higherprices. In fact, the most prominent feature of the Royal Gold income statement, other thanits 40% net profit margin, is that its single largest expense is income taxes.

Royal Golds shares have declined slightly in the past few months as a result of asecondary offering to pay for the Andacollo royalty. The 6.5 million shares were sold at aprice of $38.00. However, in making this acquisition, the company increased its reserveounces by 39% and annual revenues by potentially 31% and EBITDA by 36%. Therefore,it appears to be well worth the 18% dilution.

Royal Gold has a solid balance sheet, a good long-term growth record, an attractivepipeline of major projects over the next few years, and an excellent business model. Thecompany also has a number of non-cash producing investments (exploration mines) thathave significant option values that are not factored into the asset value calculations of thecompany. Such favorable asymmetrical return features require a purchase recommendation

as a Contrarian investment.

Advantages Of the Royalty Model

Royal Gold is a most unusual mining company insofar as it does not actually operate anymines. It merely purchases royalty or working interests in mines operated by othercompanies, and in this sense might more properly be described as a gold or precious metalsinvestment bank. Its strategy is sufficiently unique and clever that this might in itselfqualify the common shares for a purchase recommendation. The nature of the strategy willbe further elaborated in the text of this report. Uniquely, in the domain of precious metals

enterprises, the company is almost entirely free of long-term debt.

The pertinent question that must be posed at this juncture is to determine the nature of thecompetitive advantage that Royal Gold has obtained. Almost by definition, it could not begeological skill at locating mining properties or engineering skill in the development ofthose properties. If this were so, then large companies such as Goldcorp, Newmont Miningand Barrick Gold could also hire skilled individuals. The competitive advantage resides inbeing a precious metals merchant bank as opposed to a mining company. The merchantbank simply buys a profit interest in the future cash flow of a mining company at its net


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present value. The discounting mechanism provides substantial protection against theerosion of value in an investment. This is entirely different from developing a natural

resource property with no guarantee that resources can ultimately be extracted. Even ifresources are extracted, one cannot know in advance the cost of extraction. In contrast,Royal Gold makes investments when these variables are generally known. In a sense, thecompany is a financial services company that earns a spread on the deployment of itscapital. That spread is the difference between the net present value that is paid for futurecash flow and the cash flow actually realized.

It is worthwhile to consider the functional difference between other deployers of capitalsuch as banks, insurance companies, and investment advisors. One salient difference is thatfinancial services companies are operationally intensive. In other words, banks andinsurance companies might have literally millions of customers that need to be serviced in

some manner. This would also be true for a mutual fund. Moreover, the customers must beattracted and maintained. Obviously, Royal Gold requires no such marketing budget.

Another difference between traditional financial service companies and Royal Gold is thefundamental risk/reward relationship. First, a bank or insurance firm invests the capital ofdepositors or policyholders in addition to its own capital. In this sense, a bank, forexample, might in principle operate with a leverage ratio of 20 to 1. In this case, losses thatexceed 5% of the value of the invested portfolio are sufficient to bring the firm to aninsolvent status, of which we have seen numerous examples in the past year. In thealternative case, if every investment is successful, the firm earns the spread between cost ofcapital and investment return, which might equal 2% of assets for a well-managed financial

services firm. Conversely, in the success mode, which would be an environment of risinggold prices, Royal Gold might generate extraordinary returns. In the failure mode, giventhe discounted nature of the investments purchased and the debt-free status of the balancesheet, it is difficult to conceive of a scenario under which Royal Gold would be in adistressed circumstance. It is effectively a company that can invest large amounts of capitalwith very few transactions. In fact, Royal Gold is unique in that it has a marketcapitalization of $1.7 billion, $72 million in annual revenue and only 16 employees. Thelack of operational overhead results in profit margins unheard-of among ordinarycompanies.

In a limited sense, buying shares of Royal Gold to obtain exposure to gold is not very

different from the purchase of gold futures on a commodity exchange. One very obviousdifference is that one cannot readily purchase a 20-year gold future on an organizedexchange. However, there are other differences between a royalty interest and a futuresposition. In the case of a futures position, the value of the investment is determined by thechange in price of the underlying commodity. A royalty interest can benefit from otherfactors, such as increases in reserve life. This is a very important point that requires someexplanation. The calculation of the reserve life of a mine is based upon reserves that can beeconomically extracted at the current metal price. A rise in the price of a metal generallyentails an upward revision in reserves, since lower grade ores then effectively become


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economic. Similarly, a decline in price would than mean downward revision of reserves inmany instances. Yet, there is not necessarily a strict linear relationship between reserve

revision and cash flow since, as lower grade ores become uneconomic, the cash cost ofproduction usually declines since the mine operator is now effectively restricted to thehigher grade ores. This putative decline in cash cost of production will, in some degree,offset the decline in cash flow because of lower metals prices or lower production. Ofcourse, the reverse is true in the case of rising gold prices.

Another less obvious feature of the purchase of a royalty interest is that it has some of theattributes of a zero-coupon bond insomuch as there is a very low probability of a nominalloss of capital. This is because the net present value (NPV) of gold royalty cash flow to bereceived many years hence is quite low. In reality, the arithmetic is somewhat morecomplex since the royalty interest is not actually based on the selling price of gold but,

rather, the price minus certain cash costs of production. In any case, for the purposes ofsimplicity it is quite evident that in order to create a nominal loss the price of gold mustfall below the discounted price or effective purchase price. This is unlikely, as thediscounting mechanism provides for a rather wide margin of safety in terms of the possiblereduction of profit margin due to a decline in the price of gold.

The Financial Crisis Has Created Opportunities

Until last fall, diversified mining operators generally did not need a company such asRoyal Gold, as the mines produced significant cash flows and no additional funding was

necessary. However, because of the precipitous decline in certain metals prices, primarilycopper, many of these primarily base metal mining operators realized that they were over-levered and, thus, found much needed capital infusions by selling some of their future goldproduction (and/or resources) to companies such as Royal Gold. To the actual mineoperators, which must invest in equipment and employees, the benefit of using royaltyfinancing is that it avoids both equity financing, which is dilutive, and debt financing,which may have a negative impact on the balance sheet, especially in the current creditenvironment. Therefore, the royalty model provides a viable alternative to traditionalfinancing. As a result, Royal Gold has been able to make some significant acquisitions inthe past year at very favorable terms, such as its purchase of Barrick Golds ventureportfolio, and the still pending purchase of a 75% interest in the gold produced by a

Chilean mine owned by Teck Resources, known as Andacollo.

While the financial credit crunch appears to be abating, there may still be time to enter intoadditional gold royalty deals with base metal companies that might need to restructure theirbalance sheets. Some gold mining companies have been unable to access the capitalmarkets, and striking a deal with a company such as Royal Gold has provided them with anexcellent alternative. However, in general, Royal Golds capital is too expensive for mostgold miners as the terms are clearly very favorable to the company, but if the gold minershave few alternatives and need to raise capital, Royal Gold may continue to engage in


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these accretive deals. For example, it is possible that Rio Tintos highly leveraged balancesheet may compel it to sell the rights to part of its gold revenues to a company such as

Royal Gold. Rio Tinto has $38.8 billion in gross debt, including some $18.9 billion due in2009/2010, so it may be a motivated seller as it is a holder of gold and silver assets,revenues streams that may not be fully valued by investors, since they are under theumbrella of what is seen as a base-metals company.

Leveraged, Without Debt

One cannot logically exclude the possibility of an increase in precious metals prices, giventhe inflation outlook of many market observers. If this were to occur, it is important toremember that the gold royalty streams that are purchased by Royal Gold are discounted to

reflect the time value of money. This is one of the reasons that the shares trade at adiscount to realizable cash flow. The consequence of this for the investor is that in thelimiting case of an increase in gold prices, the effect on asset value is as if one wereleveraged, whereas in reality no leverage is undertaken. Thus, each 1% rise in the value ofprecious metals is magnified by the discount to realizable cash flow at which the shares arepurchased. The change in the price of gold is the change from the current spot, or nominaltrading, price. The return to the investor is the difference between the discount to realizablecash flow paid at purchase and the cash flow that is actually realized over time, which is afunction of the daily spot prices.

Consequently, even though Royal Gold has no net debt on its balance sheet, it could be

said to be leveraged to the price of gold. If the price of gold increases, the reserve estimatesfor the mines in which the company has invested will likely increase. If the price ofphysical gold were to double, the royalties collected by the company should more thandouble and its resources and reserves will likely increase significantly as well since golddeposits that were formerly uneconomical to extract would likely be mined at a profit.

In addition, most of the reserve estimates at Royal Golds mines were developed using agold price of $480-$780, so if the price of gold will average $1,500 over the next 20 years,which is not far fetched as an average annual appreciation of approximately 4% willaccomplish this, the actual amount of gold extracted from these mines will likely besubstantially greater than the current estimates. Moreover, as the operating company seeks

to maximize its return on a site, Royal Gold benefits from the additional reserves foundthrough further exploration without having to contribute more capital. One of theinteresting attributes of the increased production is that it requires no further capitalexpenditures on the part of Royal Gold. For example, the Peasquito mine in Mexico (aGoldcorp assets in which Royal Gold owns a 2.0% royalty interest) recently discovered anadditional 7.4 million ounces of reserves to the 10.0 million ounces already in theestimates. Also, the Cortez mine in the Pipeline mining complex in Nevada began withreserves of 300,000 ounces in 1995, but had 2.3 million ounces of reserves at the end of2006, even after production of 8.2 million ounces, because of new discoveries totaling 10.2


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million ounces. Consequently, Royal Gold participates in that upside without having tospend any capital or resources to turn those reserves into production and revenues.

Alternatively, if the price of gold were to decline significantly from current levels, RoyalGold would still earn significant cash flow from its royalty streams, and its low overheadand lack of debt will allow it to remain highly profitable. It could then use this cash flow toacquire additional ownership interests in times of low gold prices. The effect of the timevalue of money should insulate Royal Gold from downside risk to a large degree, sincecash flow is purchased at a discount and magnifies reward in the same manner as leveragewithout actually assuming the risk normally associated with actual leverage. On the otherhand, if gold prices were to increase sharply from current levels, Royal Gold would mostlikely see fewer opportunities for investment and it could then use its strong cash flow torepurchase shares and increase the dividend rather than to invest in additional mines.

Therefore, it appears that the risk/reward profile structurally favors the investor in a waythat is not present in the typical company.

In order to illustrate the effective leverage in the case in which gold increases in value, onemight proceed in the following manner. Let us presume a current spot price of $950 thatwould ten years hence, assuming constant gold prices, result in a cash profit of $600 anounce. In other words, the extraction cost and all additional costs amount to an estimated$350 per ounce 10 years hence. Given the formula for the present value of future cashprofit, i.e.

iK

Cp

)1(

(Where Cp = Cash profit, K = discount rate, I = number of years gold is to be mined)

the NPV of the cash profit would be $231, using a 10% discount rate. Let us now assumethat at the time of mining ten years hence, the spot price of gold has increased to $1,500per ounce. The cash profit per ounce is now $1,150 assuming that all other factors areunchanged. The effective return to the investor is the change between the $1,150 cashprofit and the $231 effective cost or NPV, which is a ROR of 17.4% per annum. In theformer example of a $600 profit per ounce, the ROR is 10%. Thus an increase in the priceof gold to $1,500, which is 56.25% or 4.57% per year, actually increases the ROR by 7.4%per year (i.e., from 10% to 17.4%). Consequently, in this case, the leverage is 61%, i.e. theROR increases 61% faster than the price of gold. In reality, the rate of return would most

likely increase even faster, as a 56% increase in the price of gold should boost thecompanys reserves and resources significantly and, ultimately, its revenues and cash flow.

The Andacollo Purchase

Teck Resources recently sold a gold-income stream from its Andacollo mine to RoyalGold for $270 million. The mine, located about 34 miles southeast of the city of La Serena,Chile, produces copper from the oxide portion of the deposit and Teck is currently


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constructing facilities to produce both copper and gold from the sulfide portion of thedeposit. However, the royalty agreement does not cover copper production.

Andacollo has proven and probable reserves of 1.6 million ounces of gold. This reserveestimate was produced with a price of gold of $480 per ounce, so it is likely that the goldreserves that can be produced at the current price of almost $1,000 per ounce will be muchhigher than that estimate. Conservatively assuming that this estimate will not be revisedupward, Royal Gold has the right to 75% of the first 910,000 ounces and 50% of theremainder which, in this case, equates to a total of 1.027 million ounces of gold anticipatedto be mined over the next 20 years. The value of this gold, if it were mined and sold today,would be close to $1.0 billion. If one buys shares of Royal Gold, one buys the discountedpresent value of a gold-based earnings stream for a very long period of time, not merelygold at its current prices. There is a compounding that naturally exists in buying the

discounted present value of a royalty companys earnings stream that does not exist inbuying the spot. For example, assuming that the gold from the Andacollo mine will bemined in 20 equal increments of 51,375 ounces per year and the price of gold will beconstant at $1,000 over the next 20 years, the annual discount rate at which Royal Goldacquired this gold is 17.5%.

The Andacollo mine is over 75% complete and is expected to be operational towards theend of the year, so Royal Gold will likely receive significant revenues in less than oneyear. Royal Gold estimates that it would collect over $32 million per year for the next 20years (estimated operating life) from this mine alone. This is based on 53,000 ounces ofproduction per year, a gold price of $900 per ounce, a minimum payable gold factor of

90.6% and a maximum refining charge of $6 per ounce. Based on this revenue stream, thediscount rate is still 10.2% per year, even though the company used an average gold pricethat is below current market prices and, perhaps more importantly, the calculation assumesthat the reserve estimate will not be revised upward even though gold prices have doubledcompared to the price at which the reserve estimate is based. Assuming that the actual goldmined over the next 20 years will be 2.0 million ounces instead of the current estimate of1.6 million ounces and assuming that the price of gold is steady at $1,000 over the 20-yearperiod, which is a very conservative assumption, the discount rate would be 22.3%. Theacquisition is expected to close in the fall.

Company Overview

Royal Gold, Inc., founded in 1981 as Royal Resources, acquires precious metals royalties.The company owns royalty interests in various producing-, development-, evaluation-, andexploration-stage projects, which explore for gold, silver, copper, lead, and zinc metals.Royal Gold was originally a more broad-based resource company, but it quicklyabandoned other commodities such as oil and gas to focus on its gold mining operations.Following the stock market crash of 1987, the company realized that it could take on muchless risk by investing in projects operated by other gold mining companies, so it switched


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to the royalty investment model. At the current time, more than 20 years later, Royal Goldis unique in that it has a market capitalization of $1.7 billion, $72 million in annual

revenue and only 16 employees. This provides an indication of how efficient thecompanys royalty model is. It is to be noted that the company maintains a strategy ofbeing 100% unhedged since it desires to maintain full exposure to a rise in gold prices.

Royal Gold has royalty interests in producing mines in 26 locations in the U.S., Canada,Mexico, Argentina, Bolivia, Nicaragua and West Africa. In addition, it has royalty interestsin 8 development stage mines and royalty interests in 25 evaluation stage projects. Thegold operators who own and operate the mines in which Royal Gold has invested aregenerally high quality companies such as Barrick Gold, Goldcorp, Newmont Mining andAnglo Gold. A royalty interest basically entitles the company to a portion of the revenuesfrom a project. There are a variety of royalty structures; the most common include gross

smelter return royalty, net profits interest royalty, net smelter return royalty, new valueroyalty and sliding-scale royalty. In the past year, the company has acquired twosignificant royalty packages, the first last year from Barrick and more recently from TeckResources. The Barrick package includes approximately 70 royalties. The following mapshows Royal Golds investments:

(Source: Royal Gold)


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While Royal Gold owns royalty interests in 15 different countries, over 64% of its currentgold reserves and over 98% of its silver reserves are located in North America. The

following table shows Royal Golds royalty interests in various mineral properties:

AccumulatedAs of March 31, 2009 (Amounts in thousands): Cost Depletion Net

Production stage royalty interests:Cortez $ 10,630 $ (9,116) $ 1,514Robinson 17,825 (5,886) 11,939Taparko 33,570 (8,380) 25,190Leeville 18,322 (7,880) 10,442Goldstrike 20,788 (9,964) 10,824Mulatos 34,214 (4,175) 30,039Peasquito (oxide circuit) 4,026 (373) 3,653Dolores 44,878 (128) 44,750

Siguiri 10,946 (2,381) 8,565Allan 22,020 (93) 21,927Other 44,068 (16,762) 27,306

261,287 (65,138) 196,149

Development stage royalty interests:Peasquito (sulfide circuit) 95,146 95,146Malartic 34,031 34,031Pascua-Lama 20,446 20,446Other 30,243 30,243

179,866 179,866

Exploration stage royalty interests 90,267 90,267

Total royalty interests in mineral properties $ 531,420 $ (65,138) $ 466,282

It is necessary to describe the four forms of economic interest that Royal Gold takes invarious mining properties.

Gross Smelter Return (GSR) royalty is a defined percentage of the gross revenuefrom a resource extraction operation, with no deduction for any costs paid by orcharged to the operator.

Net Smelter Return (NSR) royalty is a defined percentage of the gross revenuefrom a resource extraction operation, less a proportionate share of incidentaltransportation, insurance, refining, and smelting costs. There are two built-inadvantages to NSR and GSR royalties: 1) some of these contracts are structured ona sliding scale such that the percentage interest escalates as the price of the metalincreases. This represents a substantial form of non-debt leverage. 2) Furthermore,Royal Golds royalty interest often applies to a particular section of an area beingmined. As the scope of the mining activities often expands further onto thecompanys royalty lands, the volume of production applicable to Royal Gold canincrease far more rapidly than total production.


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Net Profits Interest (NPI) is a royalty based on profits after allowance for directproduction costs, roughly equivalent to cash operating income. Payments do notgenerally begin until capital costs have been recovered. This form of royalty istherefore far more volatile, since it is sensitive to the costs of production andprecious metals prices as expressed in the operating margin. As with the NSR, theroyalty holder is not liable for capital or operating costs or environmental liabilities.

Finally, Net Value Royalty (NVR) is a royalty with a defined percentage of thegross revenue from a resource extraction operation less certain contract-definedcosts.

Below, Royal Golds most important properties are discussed in more detail:

Production Stage Royalties

Cortez (Pipeline Mining Complex Nevada - Operated by Barrick Gold)The Cortez Pipeline Mining Complex is a large surface gold mining operation. Between1.6 and 2.7 million ounces in reserves are covered by Royal Golds four gold royaltyinterests, consisting of two sliding-scale gross smelter return (GSR) royalties, a fixed-rateGSR royalty and a net value return royalty (NVR).

The GSR1 and GSR2 royalty rate is currently 5.0% and covers a majority of the Pipeline,South Pipeline, Crossroads area and a portion of the Gap deposit. The fixed rate royaltyrate is at 0.71% for the life of the mine and covers the same area as the first two royalties

combined, except for the Crossroads deposit. The 0.39% NVR royalty covers productionfrom the GAS Claims, an area of interest of approximately 4,000 acres that includes theSouth Pipeline deposit, but excludes the Pipeline and Crossroads deposits. Royal Gold iscurrently receiving royalty revenue from all four royalties.

The Cortez mine produced 64,000 ounces of gold in the companys fiscal third quarter, adecrease compared to the 117,000 ounces mined in the third quarter of last year as a resultof lower grades being mined during the current period. Barrick has announced that itexpects production to improve as higher grade material is mined.

Robinson (Robinson, Nevada Operated by Quadra)

Royal Gold receives 3.0% of the revenue received by the operator of the mine, Quadra, forthe sale of minerals from the Robinson mine, reduced by certain costs incurred by Quadra.In Royal Golds fiscal third quarter, royalty revenues from Robinson fell to $1.8 millioncompared to $4.4 million in the same period last year as a result of a decrease in copperand gold prices, a decrease in copper sales and negative final pricing adjustments as thesignificant year-over-year decrease in the price of copper, from an average of $3.52 perpound in the year-ago quarter to $1.56 per pound in this years third quarter, resulted inQuadra having significant negative final pricing adjustments. Furthermore, in this yearsthird quarter, copper sales at Robinson were approximately 34.5 million pounds compared


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to 38.9 million pounds during the same period last year, which resulted in lower royaltyrevenue for the period.

Taparko (Burkina Faso, West Africa Operated by High River)The Taparko mine commenced gold production in August 2007 and has contributedapproximately $14.0 million in royalty revenue since production commenced. The minehas estimated reserves of 800,000 ounces and estimated annual production is 63,000ounces. However, mill performance has suffered since start-up because of problemsassociated with the grinding mill drive-train and production actually ceased for 4.5 monthslast summer until a new gear box to correct the mill problems was installed. Extensivemaintenance on the mill was also undertaken during shutdowns in January and in March toreduce drive train vibrations and improve the contact between pinion and the bull gear.Despite the mill only achieving 68% availability, production for the fiscal third quarter was

higher than any prior comparable period, resulting in approximately 23,000 ounces in salesduring the period.

Royal Gold holds two initial concurrent production payments, both equivalent to GSRroyalties, and two subsequent GSR royalties at the Taparko-Bouroum project, a surfacegold operation. The first GSR-equivalent royalty is fixed at a rate of 15.0%. The secondGSR-equivalent royalty is a sliding-scale royalty ranging from 0.0% to 10.0%, dependingupon the price of gold. The second royalty pays out at a rate of 4.3% when the averagemonthly gold price ranges between $385 and $430 per ounce. Outside of this range, theroyalty rate is calculated by dividing the average monthly gold price by 100 for gold pricesabove $430 per ounce, or by dividing the average monthly gold price by 90 for gold prices

below $385 per ounce (e.g., a $950 per ounce gold price results in a rate of 950/100 =9.5%). Both royalty streams continue until either total production reaches 804,420 ouncesof gold, or Royal Gold receives payments totaling $35 million under its GSR1 royalty,whichever occurs first. As of March 31, 2009, Royal Gold has recognized revenue totaling$8.8 million on production of 67,000 ounces of gold.

The two subsequent royalties consist of a 2.0% GSR perpetual royalty, applicable to goldproduction from defined portions of the Taparko-Bouroum project area, and a 0.75% GSRmilling royalty. The latter royalty applies to ore that is mined outside of the defined area ofthe Taparko-Bouroum project that is processed through the Taparko facilities, up to amaximum of 1.1 million tons per year. Both of these subsequent royalties commence once

the first two royalties, described above, have ceased.

Leeville (Nevada Operated by Newmont Mining)The Leeville Mining Complex is an underground gold mining operation located in EurekaCounty, Nevada. Royal Gold holds a 1.8% NSR royalty covering a majority of theunderground Leeville Mining Complex. The estimated reserves are 2.52 million ounces.Revenues and production fell 6-7% in the companys fiscal third quarter to $1.7 millionand 107,000 ounces, respectively.


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Goldstrike (SJ Claims, Nevada Operated by Barrick Gold)Royal Gold holds a 0.9% NSR royalty covering a portion of the Betze-Post gold mine,

known as the SJ Claims. The Betze-Post mine, which is part of the larger surfaceGoldstrike operation, is operated by Barrick Gold. The estimated reserves covered by thisroyalty are 5.8 million ounces and the annual production is estimated to be 441,000ounces. Revenues and production fell around 6% in the companys fiscal third quarter to$1.1 million and 137,000 ounces, respectively.

Mulatos (State of Sonora, Mexico Operated by Alamos Gold)

Royal Gold holds a 1.0% - 5.0% NSR sliding-scale royalty, currently paying at 5.0%. Theroyalty is capped at two million ounces of gold production. As of March 31, 2009,approximately 370,000 cumulative ounces of gold have been produced. Reserves areestimated to be 2.05 million ounces and annual production is expected to be 145,000

ounces. In the companys third fiscal quarter, Mulatos generated revenues of $1.9 millionon 42,000 ounces of production.

Peasquito (State of Zacatecas, Mexico Operated by Goldcorp)Royal Gold holds a 2.0% NSR royalty on all metals produced from the Peasquito projectoperated by Goldcorp Inc. The Peasquito project, a surface mine composed of two maindeposits called Penasco and Chile Colorado, hosts one of the worlds largest gold, silver,and zinc reserves, while also containing large lead reserves. Production commenced inJune 2008 from the oxide portion of the deposit. Start-up of the first sulfide circuit isscheduled to begin in the second half of calendar 2009 with production from the secondsulfide circuit commencing in the second half of calendar 2010. Gold reserves are

estimated to be 17.4 million ounces, silver reserves at 1.0 billion ounces, with 15.4 millionpounds of zinc and 7.1 billion pounds of lead. Estimated royalty production is 70,000ounces of gold and 2.3 million ounces of silver. Based on current metal prices, the averageannual royalty revenue would be approximately $22 million over the first 10 years ofproduction.

Dolores (State of Chihuahua, Mexico Operated by Minefinders Corp.)Royal Gold holds a 1.25% NSR on gold and a 2.0% NSR on both gold and silverproduction from the Dolores project, a surface gold and silver mine. Initial production andassociated royalty revenue from the 1.25% NSR royalty commenced in the fourth quarterof calendar 2008. On May 1, 2009, the 2.0% NSR royalty on both gold and silver became

effective. The mine produced 14,000 ounces of gold and 282,000 ounces of silver duringRoyal Golds fiscal third quarter, resulting in gold royalty revenue of $200,000. Thecompanys royalties cover an estimated 2.44 million ounces of gold and 126.7 millionounces of silver. Production is estimated to be 100,000 ounces of gold and 2.0 millionounces of silver per year.

Siguiri (Guinea, West Africa Operated by AngloGold Ashanti)Royal Gold holds a 0.0% - 1.875% NSR sliding-scale royalty currently paying 1.875%.Siguiri is a surface gold mine operated by AngloGold. The royalty is subject to a dollar cap


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of approximately $12.0 million. As of March 31, 2009, approximately $9.3 millionremains under the cap. Reserves are estimated to be 3.25 million ounces and production is

estimated to be 300,000 ounces per year. In the companys fiscal third quarter, the propertygenerated revenues of $1.3 million on 80,000 ounces of production compared to nothing inthe prior years third quarter.

Allan (Saskatchewan, Canada Operated by Potash Corp.)The Allan mine is an underground mine located approximately 24 miles east of Saskatoonnear the town of Allan, Saskatchewan. The companys royalty applies to 40% ofproduction. There are currently no estimates of reserves or annual production.

Development Stage Royalties

Canadian Malartic (Quebec, Canada Operated by Osisko)

Osisko is currently developing the Canadian Malartic gold deposit as a large-scale surfacemining operation. Royal Gold holds a 2.0% - 3.0% sliding-scale NSR royalty on theCanadian Malartic gold project. The NSR royalty is subject to a buy down right of $1.0 -$1.5 million depending upon the price of gold, and is exercisable at any time for one halfof the royalty. Estimated reserves are 4.7 million ounces and production is expected to startin 2011.

Pascua-Lama (Region III, Chile Operated by Barrick Gold)Barrick Gold has received key construction permits and environmental approvals and Chileand Argentina have reached a tax agreement on the mine. Barrick expects commissioningin late 2012 with production in early 2013. Barrick has announced forecasted average

annual production of 750,000 800,000 ounces of gold in the first five years. The mineholds reserves of 17.8 million ounces of gold and 718 million ounces of silver, and has amine life of greater than 25 years. Average production over the mine life is estimated to be600 to 700,000 ounces of gold and 20 to 25 million ounces of sliver at a total cash cost of200 to $250 per ounce. Production rates in the first five years are higher and cash costs arenotably lower. This higher grade is mined earlier in the mine life. Royal Gold holds a0.16% - 1.08% sliding-scale NSR royalty on the Pascua-Lama project, currently paying out1.08% based on current gold prices. The NSR royalty is applicable to all gold productionfrom an area of interest in Chile. Royal Gold also holds a 0.216% fixed-rate copper royaltywhich applies to all of the copper reserves in Chile within the area of interest, but does nottake effect until after January 1, 2017. At existing gold prices, this royalty could add about

$7 million in revenue annually to Royal Gold for the first five years of production.

Holloway-Holt (Ontario, Canada Operate by St Andrew Goldfields)On October 1, 2008, as part of Royal Golds acquisition of a portfolio of royalties fromBarrick Gold, it acquired a royalty on a portion of the development stage Holloway-Holtmining project in Ontario. St Andrew succeeded Newmont Canada as owner of theHolloway-Holt mining project in November 2006 and, by virtue of Royal Goldsacquisition of Barricks royalty portfolio, it succeeded Barrick as the royalty payee underthe royalty agreement. The estimated reserves covered by this royalty are 487,000 ounces


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of gold. Production is not expected to start until after 2010. The royalty percentage is basedon a rate of 0.00013 x the price of gold.

Financial Performance

For the fiscal third quarter, ended March 31, 2009, Royal Gold generated revenue of $20.8million. These revenues represented an all-time high, and an 11% increase compared to the$18.7 million recorded in the same quarter last year, primarily as a result of productionfrom the recently acquired Barrick royalty portfolio, an increase in production at Taparkoand commencement of production at Peasquito and Dolores. These increases werepartially offset by a decrease in gold and copper prices and a decrease in production atRobinson and Cortez. The Goldstrike, Leeville and Mulatos mines combined for revenue

of $5.4 million, up from $3.5 million in the same period in the prior year. The Taparkomine added at another $5.1 million in revenue, up from $3.1 million in the year-agoquarter, and the company received about $3.6 million from the royalty interest that itacquired in October 2008 from Barrick Gold. Combined, these revenue streams more thanoffset the revenue decline at its Cortez and Robinson mines, which together contributed$5.6 million. That being said, the Robinson mine has provided revenues of approximately$35 million for Royal Gold since it acquired the royalty interest in 2006 for $17.8 million.

Cortez had revenues of $3.8 million as compared to $5.3 million in the prior year periodwhile Robinson generated $1.8 million in this years third quarter compared to $4.4 millionin the third quarter of last year. Robinsons revenue also declined by $2.6 million

compared to the immediately preceding quarter as a result of lower copper prices and adecrease in copper and gold sales. In the third quarter, Royal Golds gold productioncontributed to 89% of its total royalty revenue, 3% of its total royalty revenue came fromsilver royalties and 8% of its total revenue from other metal royalties. For the remainder ofthis calendar year, increased revenues from Dolores and Peasquito are expected, as thoseproperties continue to ramp up production. For the quarter ended March 31, 2009, the priceof gold averaged $908 per ounce compared to $925 per ounce in the third fiscal quarter of2008, while the price of copper averaged $1.56 per pound in this years third quartercompared to $3.52 per pound in the same quarter in the prior year. Therefore, Royal Goldexceeded last years financial performance in a declining pricing environment. The tableon the next page outlines revenues and production for each mine:


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Royalty Revenue and Production Subject to Royalty InterestsThree Months Ended Three Months Ended

March 31, 2009 March 31, 2008

Metal(s)/ Royalty Reported Royalty ReportedRoyalty Element Revenue Production Revenue Production

Taparko Gold $ 5,091 22,963 oz. $ 3,132 14,224 oz.Cortez Gold $ 3,758 63,956 oz. $ 5,313 116,749 oz.Mulatos Gold $ 1,875 41,871 oz. $ 449 32,081 oz.Robinson $ 1,849 $ 4,384

Gold 30,257 oz. 32,313 oz.Copper 34.5 million lbs. 38.9 million lbs.

Leeville Gold $ 1,731 106,767 oz. $ 1,865 113,685 oz.Siguiri Gold $ 1,292 79,836 oz. N/A N/AGoldstrike Gold $ 1,114 136,733 oz. $ 1,195 145,369 oz.Peasquito (oxide) $ 361 N/A N/A

Gold 12,027 oz. N/A N/A

Silver 0.6 million oz. N/A N/ADolores Gold $ 161 14,169 oz. N/A N/AOther Various $ 3,565 N/A $ 2,393 N/ATotal Royalty Revenue $ 20,797 $ 18,731

(In thousands, except reported production ozs. and lbs.)

Royal Gold estimates that its four most recently acquired assets (Andacollo, Peasquito,Dolores and Malartic) will generate over $60 million in new revenues over the next 2-3years. This will be offset, to a limited extent, by some attrition at its existing mines, soannual revenues should rise from around $70 million in fiscal 2009 (ended June 30) toperhaps $120 million in FY2011.

Cost of operations increased to $1.2 million for the quarter ended March 31, 2009,compared to $1.0 million in last years third quarter as a result of an increase in legal fees.The increase was partially offset by a decrease in the Nevada Net Proceeds Tax expense,which resulted from a decrease in royalty revenue from Robinson and Cortez. General andadministrative expenses fell to $1.8 million for the third quarter, compared to $2.0 millionfor the prior years third quarter as a result of the elimination of the non-recurring generalcorporate costs associated with the conversion of all of Royal Golds preferred stock inJanuary 2008. Exploration and business development expenses decreased to $0.7 millionfor the third quarter of 2009, from $0.8 million for the same quarter last year as a result ofa decrease in tax consulting services for business development activities during the period.

Net income available to common shareholders increased to $4.1 million, or $0.12 pershare, in the third quarter of 2009, compared to $3.3 million or $0.11 per share for the thirdquarter of fiscal 2008, mostly as a result of the absence of $3.6 million in preferreddividend in this years third quarter, partly offset by increased DD&A (Depreciation,Depletion and Amortization). While, as a royalty company, Royal Gold does not have anyfurther obligations to pay for operating or capital cost, it still recognizes DD&A costs, andthese costs increased to about $10.0 million for the third quarter, compared with $5.9million for the comparable quarter last year.


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Depletion from the Barrick royalties, which the company acquired in October 2008,contributed approximately $2.7 million in additional depletion for the quarter while

increased production at Taparko resulted in additional depletion of approximately$1.1 million. Other mines that recently began production, which included Benso,Peasquito and Dolores, contributed approximately $0.8 million in additional depletionduring the third quarter. These increases were partially offset by a decrease in productionat Robinson, Troy and Leeville, which resulted in a decrease in depletion of approximately$0.5 million.

Free cash flow reached $17.5 million in the third quarter, an increase of 13% compared tothe $15.5 million reported for the same period last year. As a percentage of revenue, thisfree cash flow represented 84% of revenues in this years third quarter compared to 83% inthe prior-year period.

Royal Gold ended the quarter with the cash balance of $51 million and no long term debt.Its cash balance as of April 30 was approximately $292 million, reflecting the proceedsfrom the companys recent equity offering. We note that approximately $218 million hasbeen set aside for the closing of the Andacollo transaction.


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Valuation

Comparative ValuationStocks of royalty companies tend to be somewhat expensive, if based on traditionalvaluation measures, relative to both large and small gold mining companies, as the tablebelow indicates:

Company Symbol Price

EV/2010OCF

EV/2010Sales

Price/Book

2009 Est.Net ProfitMargin

2009 Est.EBITDAMargin

MarketCap.(millions)

Royal Gold RGLD $41.58 16.2x 11.2x 3.3x 39.0% 87.4% $1,692

Intl Royalty ROY $3.42 8.9x 6.7x 1.0x 21.6% 68.2% $300

Franco-Nevada FNV.TO $26.94 16.9x 14.5x 2.1x 20.4% 87.4% $2,768

Silver Wheaton SLW $9.32 11.3x 7.0x 3.1x 49.1% 65.6% $2,684

Ave: 13.3x 9.8x 2.4x 32.5% 77.1%

Barrick Gold ABX $36.50 11.5x 4.0x 3.2x 22.1% 43.0% $31,901

Goldcorp GG $39.00 21.3x 8.7x 2.0x 20.8% 49.9% $28,509

Newmont Mining NEM $42.00 9.9x 3.1x 1.9x 18.1% 44.2% $20,580

Ave: 10.7x 4.0x 1.8x 15.3% 34.3%

Gammon Lake GRS $7.01 5.3x 2.5x 1.6x 22.0% 42.2% $862

Aurizon Mines AZK $3.85 7.8x 3.4x 5.4x 28.4% 49.4% $612

Jaguar Mining JAG $8.72 10.0x 3.7x 5.7x 20.2% 41.0% $680

Great Basin Gold GBG $1.44 8.8x 2.3x 5.4x 20.0% 11.3% $480

Ave:8.0x 3.0x 4.5x 22.6% 36.0%

However, royalty companies generate significantly more free cash flow than the goldmining companies. In fact, the royalty companies generally convert around 70% ofrevenues into free cash flow while gold mining companies generally reinvest most or all oftheir operating cash flow into their mining operations. Also, as the table above indicates,net profit margins and EBITDA margins for the royalty companies are double the averagesfor the large and small gold mining companies. In fact, Royal Golds operating cash flowaccounted for 59% of revenues in FY2008, compared with 24%, on average, for NorthAmerican gold miners Barrick Gold, Newmont Mining and Goldcorp Inc. Consequently,the premium at which royalty companies trade relative to gold mining companies is more

than justified.

By far, the most successful royalty company in history is Franco-Nevada. $1,000 investedin Franco-Nevada in 1983 would have been worth approximately $1,250,000 today(assuming that an investor held Newmont mining shares while that company ownedFranco-Nevada earlier in the decade and repurchased the Franco-Nevada shares when itwas spun out). We note that all four royalty companies have traded at valuations of 25xcash flow, or more historically, so the current situation clearly represents a discount tohistorical levels.


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Reserve ValuationTraditionally, gold companies are valued primarily based on their reserves, rather than

sales, earnings or cash flow. However, this is a potentially misleading method sincereserves or even earnings can radically change with very small changes in the gold price.The common denominator of all gold securities is the sensitivity to the price of gold. Areasonable objective measure might then be ounces of metal per price of a given share. ForRoyal Gold, its ratio of gold ounces to its enterprise value is approximately 1.9x (followingthe Andacollo acquisition) whereas larger gold companies such as Newmont Mining andBarrick Gold have ratios of approximately 4.1x and 4.3x, respectively. However, RoyalGold does not have to pay overhead, capital expenditures or any legal/environmentalliability, so the comparison is not useful.

Net Present Value of Cash Flow Calculations

The accepted approach to the valuation of precious metals companies is to calculate the netpresent value of the cash flow to be received over the reserve lives of the mining propertiesin question. The problem arises in the estimation of the cash flow. The prices of preciousmetals in the future are obviously unknown. The production schedules in any given timeperiod are also unknown, although estimates are likely to be far more accurate thanprojections of precious metals prices. Finally, the discount rate chosen will be subjective tosome degree.

Consequently, one might avoid the problem by introducing the imaginary device of aterminal payment. In other words, let usfalselypresume that metals prices will not changeduring the productive lives of the mining assets, and let us further presume that the cash

flow is not reinvested but held in an imaginary trust with zero interest rate. The assets ofthe trust are to be distributed when the mines are thoroughly exhausted, and this will beestimated to be in 20 years. Thus, the problem is unrealistically reduced to the payment ofa sum today (purchase of shares) in exchange for the payment of a sum in the future. Sinceno reinvestment return is generated on cash flow for 20 years and no increase in preciousmetals prices is assumed, this methodology should be conservative and should err on theside of caution.

The first step is to calculate the payment needed to buy the company at the present time.This is simply the market capitalization expressed in U.S. dollars. The current share priceis $41 and there are 40.7 million shares outstanding. This is equivalent to $1.69 billion.

At the current time, Royal Gold has reserves of 1.52 million gold ounces, currently worth$1.45 billion, and 23.8 million silver ounces, currently worth $333 million. Furthermore,the company has reserves of 43 million pounds of copper, which is currently worth around$110 million. These estimates are derived by taking the proven and probable reserves ofthe mines in which it has invested and multiplying it by the current royalty rate, accordingto the table below:


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Proven and Probable Gold Reserves

Property OperatorRoyaltyType Rate

Reserves(millions)

Pro-rataShare (mil)

Bald Mountain Barrick NSR 3.75% 0.72 0.027

Cortez Barrick GSR1 5% 1.587 0.079

GSR2 5% 2.674 0.134

GSR3 0.71% 2.033 0.014

NVR 0.39% 1.592 0.006

Gold Hill Kinross/Barrick NSR 2% 0.46 0.009

Robinson Quadra NSR 3% 0.905 0.027

Goldstrike Barrick NSR 0.9% 5.768 0.052

Leeville Newmont NSR 1.8% 2.518 0.045

Taparko High River GSR1 15% 0.262 0.039

GSR2 10% 0.262 0.026GSR3 2% 0.544 0.011

Marigold Goldcorp/Barrick NSR 2% 0.683 0.014

Twin Creeks Newmont GPR 2% 0.08 0.002

Peasquito Goldcorp NSR 2% 17.43 0.349

Mulatos Alamos NSR 5% 2.05 0.102

Siguiri Anglo Gold NSR 1.875% 3.25 0.061

Dolores Mine-finders NSR 3.25% 2.44 0.079

Canadian Malarctic Osisko Mining NSR 3% 4.727 0.142

El Chanate Capital Gold NSR 4% 0.913 0.037

Pascua Lama Barrick NSR 1.08% 14.615 0.158

Warf Goldcorp NSR 2% 0.3 0.006Holt-Holloway Goldfields 12.35% 0.487 0.060

Pine Cove New Island NPI 7.50% 0.207 0.016

Williams Barrick NSR 0.72% 0.752 0.005

Meekatharra Mercator Gold A$10/ounce 0.88% 0.308 0.003

Balcooma Kagara NSR 1.50% 0.026 0.000

El Toqui Breakwater NSR 3% 0.284 0.009

El Limon B2Gold NSR 3% 0.174 0.005

Don Mario Orvana NSR 3% 0.06 0.002

Total 64.223 1.519

Andacollo Teck 75% 0.91 0.683

(Acquisition notcompleted yet) 50% 0.69 0.345

1.028

It should be remembered that the cash flow derived from precious metals sales is a royaltyinterest and therefore has a very substantial cash flow margin unlike that of other goldcompanies. In fact, Royal Golds free cash flow margin is generally around 70% whilemajor gold companies not rarely have negative free cash flow as a result of their significantcapital expenditures. In this case, one could apply a 70% cash flow margin to the sum of


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$1.52 billion gold revenue and $333 million platinum revenue and $110 million copperrevenue and derive (0.70 x ($1.45 billion. + $333 million +$110 million)) roughly $1.32

billion to be received as a terminal payment. Royal Gold also has on the balance sheetapproximately $300 million in cash and marketable securities, after its recent secondaryoffering. Since the terminal payment notion effectively presupposes liquidation mode, itwould be logical to anticipate that this $300 million would be distributed at the time ofpayment. In this instance, it would be far too draconian to assume that no return had beenearned upon this sum. A 5% compound annual return assumption for a period of 20 yearswould raise the value of the cash and marketable securities to approximately $800 million.Therefore, the theoretical terminal payment would amount to $2.12 billion ($800 million +$1.32 billion). This would be the return on an investment of $478 million, which representsa return of 1.25% per annum. It can be then said that based upon the assumptions of 1) noreinvestment return and 2) no rise in precious metals prices, that an investment in Royal

Gold is not predicated upon any increase in metals prices.

Terminal Payment Including the Andacollo MineIf we include the pending acquisition of the Andacollo mine, the numbers improve slightly.Andacollo, which should enter the production phase later this year, holds proven andprobable reserves of 1.6 million ounces of gold. However, these reserves were estimatedusing a gold price of $480. As the current price of gold is approximately twice of that, thereserves are likely substantially higher. Assuming that a revised estimate from Andacollowould result in a 30% boost to reserve figures, which may be conservative given thecurrent price of gold, that mine would have proven and probable reserves of 2.08 millionounces of gold, and Royal Gold has the right to 75% of the first 910,000 ounces and 50%

of the remainder which, in this case, comes out to 1.028 million ounces of gold. Therefore,following the acquisition of the Andacollo interest, Royal Gold would have approximately2.55 million ounces of gold, which is currently worth $2.45 billion, in addition to its $333million of silver and $110 million of copper for a total value of $2.9 billion. Using thesefigures, and adding the future value of approximately $100 million left in cash once theAndacollo transaction closes, the terminal payment, as calculated above, would come outto $2.29 billion, compared to the current $1.65 market capitalization. Consequently, theterminal payment would equate to an annual appreciation of approximately 1.7% per year.

NAV Including Reinvestment

One could calculate a net asset value based upon a reinvestment presumption. Logically,

one could assume that Royal Gold could reinvest its cash flow at the 5% return on equitythat it is expected to earn, on average, over the next two years. One could divide the $2.9billion of precious metals cash flow, following the Anadacollo transaction, into 20 equalincrements and apply it to the annuity formula in order to determine the amount of moneythat would be earned assuming reinvestment. The annuity formula is as follows:

KR

KRPV

KN

/

1)/1(


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where

V = value at the end of the periodP = amount invested on an annual basisR = rate of return on investmentK = number of compounding periodsN = number of years

The division of $2.9 billion into 20 equal increments suggests $145 million of cash flow onaverage, which is much more than is currently received. In order to weight the figures tothe future years, one could presume an average of $100 million for the first 10 years andthen $190 million for each of the next ten years. The first cash flow stream would be worth$1.258 billion at the end of year 10:

000,789,257,1$1/05.0

1)1/05.01(000,100$

10

V

This would then compound at 5.0% until, at the end of year 20, it would be worth $2.05billion.

The second stream of cash flow would be $190 million per annum that would compound at5.0% from years 11-20. This would be worth $2.641 billion at the end of year 20:

800,389,2$1/05.0

1)1/05.01(000,190$

10

V ,000

At the end of 20 years, Royal Gold should have accumulated wealth that is roughly equalto the sum of A) $265 million, which is the cash and marketable securities at 5%, B.) $2.05billion which is the result of the reinvestment of cash flow from the first ten years, and C.)$2.39 billion, which is the result of the reinvestment of cash flow from the following tenyears. This equals $4.7 billion. The initial investment to buy Royal Gold is $1.65 billion.

The return to shareholders, assuming constant metal prices, is an average annual return of5.4%

The Derivation of a Superior Rate of ReturnIt could be argued that Royal Gold has the margin of safety requirements necessary toqualify as a Graham and Dodd investment. However, the objective of a value investor is toearn a superior return with below average risk. Nothing that has been stated thus farsuggests an above average rate of return. Obviously, the catalyst needed to increase thereturn offered by these shares to a level beyond a bond return is an increase in gold prices.


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The question is to determine the degree of increase in gold prices that would be required.Given the projected 5.4% compound annual return in the so-called steady state

environment, a gradual increase in gold prices at a rate perhaps commensurate with thepresumed inflation level of 3% per annum would likely carry the return to double digitlevels, as a gradual increase in gold prices would also gradually increase the volume ofreserves that would be considered economic. Thus, a very attractive return can begenerated. Of course, if a much more pronounced rise in price does occur with regard togold or precious metals in general, then the return to shareholders could be quitesubstantial. In essence, Royal Gold is a security that should provide a bond-like return inthe absence of rising gold prices and outstanding returns in the case of increasing goldprices. If gold prices increase, the price appreciation of Royal Golds shares should bemuch more pronounced than the gold price increase due to the leverage built into itsdiscounted cash flow formula, and increases in reserves and net asset value, which

increases as more of the properties owned become economic.

Summary & Recommendation

Royal Golds royalty portfolio provides investors with a unique opportunity to capturevalue in the precious metals sector without incurring many of the risks associated withmining operations, such as capital costs, operating costs, and environmental liabilities. Thedistinction between a royalty company and a mining company is very important in thecurrent market environment in which the costs to build and operate mines are risingsignificantly. With a successful business model and business strategy that generates strong

cash flow and high margins due to its low cost structure, Royal Gold provides shareholderswith a premium precious metals exposure in a lower risk vehicle. Additionally, Royal Goldprovides investors with valuable leverage to improving gold prices with sliding-scaleroyalties, while lowering its risk from decreasing gold prices through fixed rate royaltiesand floors on its sliding-scale royalties.

The royalty streams purchased by Royal Gold are discounted to reflect the time value ofmoney. Since they are based on gold production, Royal Gold can be said to own hugevolumes of gold at deeply discounted prices. Of course, the discount can only be recoveredover time. However, the mathematical consequences of the discount to the investor arehighly beneficial. Firstly, it is so deep as to provide a return commensurate with a 30 year

Treasury bond and perhaps competitive with equities, all else equal. With respect to anincrease in gold prices, the impact on return is as if one were leveraged, whereas noleverage is actually undertaken. A very small boost in gold prices can result in a verysignificant change in value of the shares of this enterprise. On the other hand, the nature ofthe enterprise hedges the investor against many of the risks normally associated with theownership of gold. Consequently, the shares of Royal Gold represent a low risk/highreward mechanism to invest in gold. These asymmetrical return features are sufficientlyalluring such that purchase of the shares is currently recommended.


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ROYAL GOLD, INC.Consolidated Balance Sheets

(Unaudited, in thousands except share data)

March 31, June 30,2009 2008

(As Restated)

Current assetsCash and equivalents $ 50,538 $ 192,035Royalty receivables 18,248 16,317Income taxes receivable 2,038 2,186Deferred tax assets 91 131Prepaid expenses and other 1,429 308

Total current assets 72,344 210,977

Royalty interests in mineral properties, net 466,282 300,670Restricted cash compensating balance 19,250 15,750Inventory restricted 11,052 11,170Other assets 5,786 7,283

Total assets $574,714 $ 545,850

Current liabilitiesAccounts payable $ 5,702 $ 4,753Dividends payable 2,738 2,384Other 2,135 1,797

Total current liabilities 10,575 8,934

Net deferred tax liabilities 23,468 26,034Term loan facility 19,250 15,750Other long-term liabilities 688 504

Total liabilities 53,981 51,222

Commitments and contingenciesMinority interest in subsidiary 11,416 11,411Stockholders equityCommon stock, $0.01 par value, authorized 100,000,000 shares; and issued33,958,082 and 33,926,495 shares, respectively 340 339Additional paid-in capital 466,100 463,335Accumulated other comprehensive (loss) income (32) 65Accumulated earnings 42,909 19,478

Total stockholders equity 509,317 483,217

Total liabilities and stockholders equity $574,714 $ 545,850


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ROYAL GOLD, INC.Consolidated Statements of Operations and Comprehensive Income

(Unaudited, in thousands except share data)

For The Three Months Ended

March 31, March 31,2009 2008

(As Restated)

Royalty revenues $ 20,797 $ 18,731

Costs and expensesCosts of operations (exclusive of depreciation, depletion and amortizationshown separately below) 1,154 1,006General and administrative 1,812 1,981Exploration and business development 732 817Depreciation, depletion and amortization 9,960 5,925

Total costs and expenses 13,658 9,729

Operating income 7,139 9,002

Interest and other income 1,075 1,715Interest and other expense (266) (330)

Income before income taxes 7,948 10,387

Income tax expense (2,534) (3,358)Minority interest in income of consolidated subsidiary (1,272) (140)

Net income $ 4,142 $ 6,889

Adjustments to comprehensive incomeUnrealized change in market value of available for sale securities, net of tax (24) (109)

Comprehensive income $ 4,118 $ 6,780

Net income $ 4,142 $ 6,889Preferred dividends (3,584)

Net income available to common stockholders $ 4,142 $ 3,305

Basic earnings per share $ 0.12 $ 0.11

Basic weighted average shares outstanding 34,008,758 30,932,084

Diluted earnings per share $ 0.12 $ 0.11

Diluted weighted average shares outstanding 34,447,169 31,213,663

2009 august rgld contrarian comprehensive

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