Royal Gold’s Swiss Tax Holiday

Royal Gold’s winning all the big deals it seems.

Valued at $3bn and based in Denver, the company is the third largest streaming group by market cap, trailing Franco-Nevada and Silver Wheaton, but in the last 6 months it has announced hefty new streaming agreements with Teck, New Gold and Golden Star in Chile, Canada and Ghana.

In August, it also struck a $610m deal with Barrick Gold over the Pueblo Viejo mine in the Dominican Republic, currently the world’s largest gold mine, which has long been coveted for a streaming deal by rival Silver Wheaton.

In total, Royal Gold’s chief executive Tony Jensen has deployed $1.2bn since May, versus $900m deployed by Silver Wheaton this year and around $35m by Franco-Nevada.

Hard Rock

According to brokers who have been briefed by the company, Royal Gold’s romp of recent deals is being driven by two things.

In 2010, the company struck a $312m streaming deal over gold byproduct from the Mount Milligan copper mine in British Columbia, owned by molybdenum miner, Thompson Creek Metals. But as construction costs ballooned from C$915m to over C$1.5bn ($1.1bn), Royal Gold dipped into its credit facilities and doubled-down on the transaction twice, lifting the total deal cost to $782m.

Battling hard rock and insufficient crushing power, the mine has failed to meet nameplate capacity, which is no longer expected before the end of this year. “The mills were turning,” wrote analysts at RBC after a site visit, “but slowly.”

Mount Milligan

Mount Milligan nonetheless accounts for an uncomfortable 34 per cent of Royal Gold’s attributable production, according to an update last month.

The weight of the mine in Royal Gold’s portfolio has forced it into regular status updates, news that royalty and streaming investors, who are meant to be divorced from the nitty-gritty details of a mine start-up plan, are unaccustomed to hearing.

To diversify the company away from Mount Milligan, it is now trying to bulk-up elsewhere, diluting Mount Milligan down, Tony Jensen told fund managers in a meeting in Toronto in June. As capital allocation goes, it is less than ideal: having over-exposed itself to one asset, management is quickly shipping-in others.

Di-Worsify

Rather than bulk-up on small deals, a shotgun approach, Royal Gold appears to be letting off its elephant gun like an automatic rifle.

Through its deals with Barrick and Teck, the company has gone from having one asset represent more than a third of its value to having three mines account for more than 20 per cent each. Mount Milligan has been diluted down, but arguably the company has tripled its chances of a major mine disruption.

In its eagerness to swallow new assets, Royal Gold has outbid competitors, whilst hiring new staff in Switzerland and Toronto, poaching Jason Hynes, a former M&A advisor at National Bank, from Sabina Gold & Silver. It also relinquished “first-lien security” on its Pueblo Viejo deal with Barrick, meaning it has limited recourse to the parent company if either Barrick or the stream payments falter.

Royal Gold’s share price has meanwhile dropped 30 per cent this year, whilst Jensen sold $1.4m of stock last week, equal to 14 per cent of his holding.

Switzerland

But a second factor, tax, is also driving Royal Gold’s anxiety to gun money out the door.

The majority of its royalty and streaming revenue is earned on mines outside the US, so rather than funnel cash through its corporate accounts in Denver, the company can divert payments through a wholly-owned subsidiary, RGLD Gold AG, which is domiciled in a bland looking concrete office block in the Swiss city of Zug.

Described as “tax-light” by The Financial Times, Zug houses more companies than people. It is seen by tax experts as “a badland” for commodity traders, where transparency is minimal and rates can be negotiated behind closed doors.

0.5 per cent

According to one source, which Royal Gold declined to verify or deny, the company has negotiated a tax rate in Zug below 0.5 per cent. On top of flat Swiss federal rates of 8.5 per cent, its total tax bill in Switzerland is less than 9 per cent.

And increasingly, the company is reshuffling its cash flow away from the US. All its deals this year have been structured through Zug and in July, it swapped a US-taxable royalty over Teck’s Andacollo copper mine in Chile for a larger Swiss-structured stream. Its overall tax bill has meanwhile obligingly dropped from $64m in 2013 to $19m last year, equal to an effective tax rate of 23 per cent.

Silver Wheaton paid zero tax in 2014, but was recently clobbered by a $265m fine for alleged underpayment, whilst Franco-Nevada paid 32 per cent in its last full year. Seemingly, Royal Gold is operating under a large tax advantage, allowing it to pay more fully for assets and land the biggest deals.

Deferred Bill

But is the company storing up a problem for itself, by signing agreements inflated by low levels of tax?

Royal Gold is in good company when it comes to US corporates holding money offshore. From Apple, MasterCard and eBay to Citigroup and General Electric, an estimated $1.95 trillion falls into the same bracket, with tech groups and drug companies the biggest culprits.

Offshore profits are only exempt from US tax if they are “indefinitely reinvested” offshore, blocking companies from using the money to pay dividends, buyback shares or strike deals in the US, which would be clocked with a tax rate of 35 per cent.

Buying Binge

One solution adopted by eBay was to splurge money on experimental acquisitions outside the US, spending $4.6bn over ten years in a dizzying spell of deals, everywhere from Turkey and Luxembourg to Spain.

Recent big-ticket deals by Royal Gold in Ghana and Macedonia, jurisdictions that would look out-of-place in Silver Wheaton’s portfolio or Franco’s, suggest it may be following a similar, tax-driven model. eBay’s buying binge however only added to its treasury overseas and the company finally decided to cop a $3bn tax bill last year, by repatriating $9bn of cash.

As one buy-side analyst puts it, in the long term, Royal Gold’s tax advantage may not be an advantage after all. But one group of companies is definitely benefiting: mine operators offered a lofty sounding deal by Royal Gold’s Swiss office should jump at the terms, because the group’s tax tailwind may one day change course.

Co-published by Global Mining Observer