| ROYAL GOLD INC ITEM 1A RISK FACTORS Every investor or potential investor in Royal Gold should carefully consider the following risks: Risks Related to Our Business Our revenues are largely dependent on a single property |
| In fiscal year 2006, approximately 59prca of our revenues were derived from royalties from the Pipeline Mining Complex, compared to approximately 85prca being derived from the Pipeline Mining Complex in fiscal year 2005 |
| We expect that revenue from our royalties on the Pipeline Mining Complex will continue to be a significant, though less dominant, contributor to our revenue in future periods |
| Our success has been, and to a lesser degree will continue to be, dependent on the extent to which the Pipeline Mining Complex continues to be a substantial mining operation |
| We own passive interests in mining properties, and it is difficult or impossible for us to ensure properties are operated in our best interest |
| The holder of a royalty interest typically has no executive authority regarding development or operation of a mineral property |
| Therefore, we are not in control of basic decisions regarding development or operation of any of the properties in which we hold a royalty interest, and we have limited or no legal rights to influence those decisions |
| Our strategy of having others operate properties in which we retain a royalty or other passive interest puts us generally at risk to the decisions of others regarding all basic operating matters, including permitting, feasibility analysis, mine design and operation, processing, plant and equipment matters, and temporary or permanent suspension of operations, among others |
| These decisions may be motivated by the best interests of the operator rather than to maximize royalties |
| Although we attempt to secure contractual rights that will permit us to protect our interests, there can be no assurance that such rights will always be available or sufficient, or that our efforts will be successful in achieving timely or favorable results or in affecting the operations of the properties in which we have royalty interests in ways that would be beneficial to our stockholders |
| Decreases in prices of gold, silver and copper would reduce our royalty revenues |
| The profitability of our royalty interests and exploration properties is directly related to the market price of gold and, to a lesser degree, silver and copper |
| The market price of each metal fluctuates widely and is affected by numerous factors beyond the control of any mining company |
| These factors include industrial and jewelry fabrication demand, expectations with respect to the rate of inflation, the relative strength of the US dollar and other currencies, interest rates, gold sales and loans by central banks, forward sales by metal producers, global or regional political, economic or banking crises, and a number of other factors |
| Our sliding-scale GSR1 royalty amplifies this |
| When the gold price falls below the steps in the sliding-scale GSR1 royalty, we receive a lower royalty rate on production |
| In addition, if the gold, silver or copper price drops dramatically, we might not be able to recover our investment in royalty interests or properties |
| The selection of a royalty investment or of a property for exploration or development, the determination 11 _________________________________________________________________ [68]Table of Contents 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 have a material adverse effect on the economics of a mine, and can eliminate or have a material adverse impact on the value of royalty interests |
| The volatility in gold prices is illustrated by the following table, which sets forth, for the periods indicated (calendar year), the high and low prices in US dollars per ounce of gold, based on the London PM fix |
| Gold Price Per Ounce ($) Year High Low 1998 $ 313 $ 273 1999 326 253 2000 312 263 2001 293 256 2002 349 278 2003 416 320 2004 454 375 2005 537 411 January 1-August 25, 2006 725 525 The volatility in silver prices is illustrated by the following table which sets forth, for the periods indicated (calendar year), the high and low prices in US dollars per ounce of silver, based on the London PM fix |
| Silver Price Per Ounce ($) Year High Low 1998 $ 7dtta81 $ 4dtta69 1999 5dtta75 4dtta88 2000 5dtta45 4dtta57 2001 4dtta82 4dtta07 2002 5dtta10 4dtta24 2003 5dtta97 4dtta37 2004 8dtta29 5dtta50 2005 9dtta23 6dtta39 January 1-August 25, 2006 14dtta94 8dtta83 12 _________________________________________________________________ [69]Table of Contents The volatility in copper prices is illustrated by the following table, which sets forth, for the periods indicated (calendar year), the high and low prices in US dollars per pound of copper, based on the London Metal Exchange cash settlement price for copper Grade A Copper Price Per Pound ($) Year High Low 1998 $ 0dtta82 $ 0dtta67 1999 0dtta80 0dtta63 2000 0dtta89 0dtta76 2001 0dtta81 0dtta62 2002 0dtta75 0dtta67 2003 1dtta00 0dtta72 2004 1dtta43 1dtta10 2005 2dtta08 1dtta44 January 1 – July 31, 2006 3dtta65 2dtta15 We depend on the services of our President and Chief Executive Officer, our Executive Chairman and other key employees |
| We believe that our success depends on the continued service of our key executive management personnel |
| Currently, Tony Jensen is serving as President and Chief Executive Officer and Stanley Dempsey is serving as our Executive Chairman |
| Jensen has extensive experience in mining operations |
| Dempsey’s knowledge of the legal and commercial aspects of royalties and his extensive contacts within the mining industry give us an important competitive advantage |
| Dempsey or other key employees could jeopardize our ability to maintain our competitive position in the industry |
| We currently do not have key person life insurance for any of our officers or directors |
| Our revenues are subject to operational risks of the mining industry |
| Although we are not required to pay operating costs, our financial results are subject to all of the hazards and risks normally associated with developing and operating mining properties, both for the properties where we are exploring or indirectly for properties operated by others where we hold royalty interests |
| These risks include: – insufficient ore reserves; – fluctuations in production costs that may make mining of ore uneconomic; – declines in the price of gold, silver or copper; – significant environmental and other regulatory restrictions; – labor disputes; 13 _________________________________________________________________ [70]Table of Contents – geological problems; – pit walls or tailings dam failures; – natural catastrophes such as floods or earthquakes; and – the risk of injury to persons, property or the environment |
| Operating cost increases can have a negative effect on the value of and income from our royalty interests, and may cause an operator to curtail, delay or close operations at a mine site |
| Estimates of reserves and mineralization by the operators of mines in which we have royalty interests are subject to significant estimates which can change |
| There are numerous uncertainties inherent in estimating proven and probable reserves and mineralization, including many factors beyond our control or that of the operators of mineral properties in which we have a royalty interest |
| Reserve estimates on our royalty interests are prepared by the operators of the mining properties, and we do not participate in the preparation of such reports |
| The estimation of reserves and of other 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 cause revision of such estimates |
| The volume and grade of reserves recovered and rates of production may be less than anticipated |
| Assumptions about prices are subject to great uncertainty and such 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 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 |
| We may be unable to acquire additional royalty interests |
| Our future success depends upon our ability to acquire royalty interests to replace depleting reserves and to diversify our royalty portfolio |
| We anticipate that most of our revenues will be derived from royalty interests that we acquire or finance, rather than through exploration and development of properties |
| In addition, we face competition in the acquisition of royalty interests |
| If we are unable to successfully acquire additional royalties, the reserves on properties currently covered by our royalties will decline as existing reserves are mined |
| Anticipated federal legislation could decrease our royalty revenues |
| In recent years, the United States Congress has considered a number of proposed major revisions of the General Mining Law, which governs the creation and possession of mining claims and related activities on federal public lands in the United States |
| It is possible that another bill may be introduced in the Congress and it is possible that a new law could be enacted |
| If and when a new mining law is enacted, it might impose a royalty upon production of minerals from federal lands and might contain new requirements for mined land reclamation, and similar environmental control and reclamation measures |
| It remains unclear to what extent new legislation may affect existing mining claims or operations, but it could raise the cost of mining operations, perhaps materially affecting operators and our royalty revenue |
| 14 _________________________________________________________________ [71]Table of Contents The effect of any revision of the General Mining Law on royalty interests in the United States cannot be determined conclusively until such revision, if any, is enacted |
| The majority of our interests are on public lands |
| If a royalty, assessment, production tax or other levy imposed on and measured by production is charged to the operator at the Pipeline Mining Complex, the amount of that charge would be deducted from gross proceeds for calculation of our GSR1, GSR2 and GSR3 royalties |
| The mining industry is subject to significant environmental risks |
| Mining is subject to potential risks and liabilities associated with pollution of the environment and the disposal of waste products occurring as a result of mineral exploration and production |
| Laws and regulations in the United States and abroad intended to ensure the protection of the environment are constantly changing and generally are becoming more restrictive and costly |
| 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 companies within the mining industry, such as the operators of the mines in which we hold a royalty interest, at a reasonable price |
| If an operator is forced to incur significant costs to comply with environmental regulations or becomes subject to environmental restrictions that limit its ability to continue or expand operations, it could reduce our royalty revenues |
| To the extent that we become subject to environmental liabilities for the time period during which we were operating properties, the satisfaction of any liabilities would reduce funds otherwise available to us and could have a material adverse effect on our financial condition, results of operations and cash flows |
| In September 2002, we settled a claim by the EPA against Royal Gold, along with 92 other potentially responsible parties, known as PRPs |
| The EPA’s allegation was based on the disposal of allegedly hazardous petroleum exploration wastes at the Casmalia Resources Hazardous Waste Site by our predecessor, Royal Resources, Inc, during 1983 and 1984 |
| Although we do not currently expect to incur additional costs in connection with this claim, the State of California has notified us and the other parties who participated in the settlement that it will seek to recover response costs |
| We do not know and cannot predict the amount of the estimated costs the State would seek to recover but, if we are compelled to pay a large sum, it could materially adversely affect our operations |
| If the State agrees to a volumetric allocation among the parties, our portion of the liability would |