Royal Gold Financial Analysis
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Introduction
This paper examines certain key financial ratios for three companies’ which operate in the market of gold. Presented are analyses and comparisons of the companies for the three most recent years, 2004, 2005, 2006. The focal point of the original analysis was Royal Gold. Two other strong companies in the gold market are Newmont Mining and Barrick Gold Corporation.
Royal Gold, Inc. is a Denver, Colorado based company. It is primarily in the business of buying and selling gold royalties. Newmont Mining is also a Denver, Colorado company. Newmont is one of the world’s leading gold mining companies. Barrick Gold is headquartered in Toronto, Canada but is traded on both the Canadian stock exchange and the New York stock exchange. Barrick’s strategy is exploration and operating of gold and copper mines and a pipeline operation.
Royal Gold differs from Barrick and Newmont because Royal Gold does not operate and finance actual mining operations. Barrick and Newmont were selected because it is the quantity mined and the price of gold that unites them.
PE Ratio
PE Ratio
2004
Royal Gold Inc
Newmont Mining Corp
Barrick Gold Corp
The following is a visual graph of the data above.
The first financial ratio of the analysis is the Price to Earnings ratio (“P/E ratio”). The ratio is computed by dividing the price of one share of common stock, by the earnings per share of common stock. This analysis uses diluted earnings per share which assumes the issuance of new stock for all existing stock options. Also, the price of the stock was computed as an average of the fourth quarter high and low stock prices published in the 10K report of each company, because the year end stock prices were not listed for all the companies. Because the P/E ratio measures the relative costliness of different stocks, in relation to their income, it provides a useful place to begin the analysis.
A comparison of the PE Ratio for these three companies shows a great deal about how investors view Royal Gold Inc. in comparison to competitors in the industry. All three companies have had ups and downs over the past three years yet Royal Gold has remained fairly solid. The prospect of strong growth appears to nearly double the PE Ratio from 2004 to 2005 for Royal Gold and Newmont Mining Corp. Yet over this same time period Barrick Gold Corp. saw a dip in their PE Ratio. This could be attributed to the fact that Barrick Gold Corp may have been taking on some riskier projects and investors are worried about earnings being less than the prior year. The jump for Royal Gold and Newmont Mining Corp shows that investors are confident in prospective earnings over these years and view these companies as less risky investments. Another reason for this price climb could be that gold investors may have thought that gold prices would rise and keep on climbing. Investors were willing to pay a premium for Newmont Mining and Royal Gold stock. They may have believed that with the increase in the price of gold, Newmont and Royal Gold, would show higher earnings. Significant earnings would justify the increased price paid for the stock. Then from 2005 to 2006 the PE Ratio for all three companies dropped which can most likely be attributed to an over speculation by investors the previous year and the market correcting itself. Overall in the three years Royal Gold held a strong PE Ratio in comparison to the other two firms. This most likely is due to the fact that investors view Royal Gold’s business plan as a better and less risky investment. The fact that Royal Gold has maintained very little overhead costs and they continue to purchase royalties in precious metal mines shows the continued focus on growth of Royal Gold.
Return on Total Assets
Return on Total Assets (ROA) %
2004
Royal Gold Inc
11.19
Newmont Mining Corp
3.47
Barrick Gold Corp
3.94
The following chart shows return on assets for the years ended 2004-2006.
The return on total assets (ROA) can tell us a great deal about how effectively a company is using its assets. Over three years for each of these companies the ROA has been in constant motion. Newmont Mining Corp. and Barrick Gold Corp. have generally seen an increase in their ROA during this time period. Royal Gold on the other hand has seen their ROA decrease on a yearly basis. This is most likely due to the fact that Royal Gold has been investing in future royalties that are not in the production stage yet. The other two companies are finally seeing returns from mining operations that had been set up in years past. It appears that Royal Gold is focused on the future of their business. The fact that Royal Gold had it highest ROA in 2004 and has seen a significant drop in the years that followed may show that in 2004 they generated a good amount of income from the producing assets they had at the time. By investing in precious metal royalties in mines that are not yet producing Royal Gold’s ROA went down. Once new mining royalties move from the development to the producing stage the royalty receivables will begin to increase which should make the ROA increase again. Not to mention the fact that even with this investment in future royalties Royal Gold has still managed to remain fairly competitive on the basis of ROA with the other two companies.
Return on Equity
Return on Equity (ROE) %
2004
Royal Gold Inc
12.49
Newmont Mining Corp
5.58
Barrick Gold Corp
10.61
10.42
6.93
The following chart shows return on equity for the years ended 2004-2006.
The return on equity percentage can tell us a great deal about how much profit a company is generating from the money that stockholders have invested. Royal Gold has seen a decrease