Contrarian Research Report

August 6, 2009

Royal Gold, Inc.

(BUY)

Price: 52-wk. range: Shares out.: Market Cap.:

$41.48 $49.81 - $22.75 40.7 million $1.7 Billion

Ticker: RGLD Dividend: $0.32 Yield: 0.80%

Horizon Research Group

Steven Bregman Naveen Kumar Thrse Byars David Leibowitz Peter Doyle Eric Sites Michael Gallant Fredrik Tjernstrom Matthew Houk Steven Tuen Murray Stahl

Exclusive Marketers of The Contrarian Report

PCS Research Services 125 Maiden Lane 6th Floor New York, NY 10038 (212) 233-0100 www.pcsresearchservices.com

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 or sell securities. All expressions of opinion reflect judgment at this date and are subject to change. Horizon Research Group and others associated with it may have positions in securities of companies mentioned. Reproduction of this report is strictly prohibited. Horizon Research Group, 2009.

The Contrarian Research Report

Horizon Research Group, 2009

Page 2

The Contrarian Research Report

Investment Thesis Royal Gold is not a gold miner; it is a purchaser of interests in the gold mines of other gold miners. 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 value of the cash flow over the life of the mine which, in many cases, exists over decades. Royal Gold 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 Golds interests can be found in a wide spectrum of mines, from well-established mines that have resources, reserves and actually produce gold to more speculative investments in mines that have no proven reserves, just resources. Presumably, the newer mines will reach production at some point in the future and, thereby, offset depletion experienced in the more 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 evaluation properties. Its pipeline is solid, including a royalty on the large Pensasquito mine of Goldcorp which, when it ramps up production in 2012, should add approximately 25% to Royals revenues. Mining companies benefit from the royalty model by getting to raise capital without selling equity, and that capital can be used immediately to explore or develop a mining property, while Royal Gold avoids operating expense, capital expenditure requirements, capital calls or environmental liabilities. Royalties can continue for the life of the mine, which for some of Royal Golds most significant sources of royalty revenue are 25 years or longer. As a result, 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 $70 million per annum. However, as the new mines enter the production phase from the development and construction phase, Royal Gold expects to receive additional revenues of approximately $60 million per year over the next 1.5 years. There will be some depletion at the existing mines, though, so the total revenues going forward should be slightly less than the sum of these numbers. The credit crisis has actually helped Royal Gold to strike some very favorable deals in the past 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 crisis meant that these companies were generally cut off from the capital markets and the plunge in some metal prices, such as copper, significantly reduced their cash flow, and some of the most leveraged mining companies got into trouble. Consequently, Royal Gold has been able to purchase significant gold royalties in the past year at favorable prices (high discount rates), such as a royalty package from Barrick Gold and, more recently, a royalty interest in the Andacollo mine from Teck Resources. The Barrick package includes approximately 70 royalties. Even before these acquisitions, Royal Gold had a solid long-

Horizon Research Group, 2009

Page 3

The Contrarian Research Report

term growth record, both in terms of royalties and revenues. These investments will likely benefit the company over the next 20 years. Royal Gold can be considered to be a finance company, as the relative mix of revenue and gross profit interests endow it with some of the characteristics of a general partner in a hedge fund. That is, 1) its earnings are leveraged by the investments of the primary investors, which are orders of magnitude larger than its own (Royal Golds interest is typically only a few percent in each mine), and 2) so long as a mine is active, the company receives 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 higher prices. In fact, the most prominent feature of the Royal Gold income statement, other than its 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 a secondary offering to pay for the Andacollo royalty. The 6.5 million shares were sold at a price of $38.00. However, in making this acquisition, the company increased its reserve ounces 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 attractive pipeline of major projects over the next few years, and an excellent business model. The company also has a number of non-cash producing investments (exploration mines) that have significant option values that are not factored into the asset value calculations of the company. 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 any mines. It merely purchases royalty or working interests in mines operated by other companies, and in this sense might more properly be described as a gold or precious metals investment bank. Its strategy is sufficiently unique and clever that this might in itself qualify the common shares for a purchase recommendation. The nature of the strategy will be 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 the competitive advantage that Royal Gold has obtained. Almost by definition, it could not be geological skill at locating mining properties or engineering skill in the development of those properties. If this were so, then large companies such as Goldcorp, Newmont Mining and Barrick Gold could also hire skilled individuals. The competitive advantage resides in being a precious metals merchant bank as opposed to a mining company. The merchant bank simply buys a profit interest in the future cash flow of a mining company at its net
Horizon Research Group, 2009 Page 4

The Contrarian Research Report

present value. The discounting mechanism provides substantial protection against the erosion 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 if resources 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, the company is a financial services company that earns a spread on the deployment of its capital. That spread is the difference between the net present value that is paid for future cash flow and the cash flow actually realized. It is worthwhile to consider the functional difference between other deployers of capital such as banks, insurance companies, and investment advisors. One salient difference is that financial services companies are operationally intensive. In other words, banks and insurance 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 be attracted and maintained. Obviously, Royal Gold requires no such marketing budget. Another difference between traditional financial service companies and Royal Gold is the fundamental risk/reward relationship. First, a bank or insurance firm invests the capital of depositors or policyholders in addition to its own capital. In this sense, a bank, for example, might in principle operate with a leverage ratio of 20 to 1. In this case, losses that exceed 5% of the value of the invested portfolio are sufficient to bring the firm to an insolvent status, of which we have seen numerous examples in the past year. In the alternative case, if every investment is successful, the firm earns the spread between cost of capital 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 rising gold prices, Royal Gold might generate extraordinary returns. In the failure mode, given the discounted nature of the investments purchased and the debt-free status of the balance sheet, it is difficult to conceive of a scenario under which Royal Gold would be in a distressed circumstance. It is effectively a company that can invest large amounts of capital with very few transactions. In fact, Royal Gold is unique in that it has a market capitalization of $1.7 billion, $72 million in annual revenue and only 16 employees. The lack of operational overhead results in profit margins unheard-of among ordinary companies. 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 obvious difference is that one cannot readily purchase a 20-year gold future on an organized exchange. However, there are other differences between a royalty interest and a futures position. In the case of a futures position, the value of the investment is determined by the change in price of the underlying commodity. A royalty interest can benefit from other factors, such as increases in reserve life. This is a very important point that requires some explanation. The calculation of the reserve life of a mine is based upon reserves that can be economically extracted at the current metal price. A rise in the price of a metal generally entails an upward revision in reserves, since lower grade ores then effectively become
Horizon Research Group, 2009 Page 5

The Contrarian Research Report

economic. Similarly, a decline in price would than mean downward revision of reserves in many 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 of production usually declines since the mine operator is now effectively restricted to the higher 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. Of course, 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 the attributes of a zero-coupon bond insomuch as there is a very low probability of a nominal loss of capital. This is because the net present value (NPV) of gold royalty cash flow to be received many years hence is quite low. In reality, the arithmetic is somewhat more complex 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 of simplicity it is quite evident that in order to create a nominal loss the price of gold must fall below the discounted price or effective purchase price. This is unlikely, as the discounting mechanism provides for a rather wide margin of safety in terms of the possible reduction 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 as Royal Gold, as the mines produced significant cash flows and no additional funding was necessary. However, because of the precipitous decline in certain metals prices, primarily copper, many of these primarily base metal mining operators realized that they were overlevered and, thus, found much needed capital infusions by selling some of their future gold production (and/or resources) to companies such as Royal Gold. To the actual mine operators, which must invest in equipment and employees, the benefit of using royalty financing 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 credit environment. Therefore, the royalty model provides a viable alternative to traditional financing. As a result, Royal Gold has been able to make some significant acquisitions in the past year at very favorable terms, such as its purchase of Barrick Golds venture portfolio, 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 into additional gold royalty deals with base metal companies that might need to restructure their balance sheets. Some gold mining companies have been unable to access the capital markets, and striking a deal with a company such as Royal Gold has provided them with an excellent alternative. However, in general, Royal Golds capital is too expensive for most gold miners as the terms are clearly very favorable to the company, but if the gold miners have few alternatives and need to raise capital, Royal Gold may continue to engage in
Horizon Research Group, 2009 Page 6

The Contrarian Research Report

these accretive deals. For example, it is possible that Rio Tintos highly leveraged balance sheet 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 in 2009/2010, 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 the umbrella 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, given the inflation outlook of many market observers. If this were to occur, it is important to remember 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 a discount to realizable cash flow. The consequence of this for the investor is that in the limiting case of an increase in gold prices, the effect on asset value is as if one were leveraged, whereas in reality no leverage is undertaken. Thus, each 1% rise in the value of precious metals is magnified by the discount to realizable cash flow at which the shares are purchased. The change in the price of gold is the change from the current spot, or nominal trading, price. The return to the investor is the difference between the discount to realizable cash flow paid at purchase and the cash flow that is actually realized over time, which is a function 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 estimates for the mines in which the company has invested will likely increase. If the price of physical gold were to double, the royalties collected by the company should more than double and its resources and reserves will likely increase significantly as well since gold deposits 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 a gold 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% will accomplish this, the actual amount of gold extracted from these mines will likely be substantially 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 found through further exploration without having to contribute more capital. One of the interesting attributes of the increased production is that it requires no further capital expenditures on the part of Royal Gold. For example, the Peasquito mine in Mexico (a Goldcorp assets in which Royal Gold owns a 2.0% royalty interest) recently discovered an additional 7.4 million ounces of reserves to the 10.0 million ounces already in the estimates. Also, the Cortez mine in the Pipeline mining complex in Nevada began with reserves of 300,000 ounces in 1995, but had 2.3 million ounces of reserves at the end of 2006, even after production of 8.2 million ounces, because of new discoveries totaling 10.2
Horizon Research Group, 2009 Page 7

The Contrarian Research Report

million ounces. Consequently, Royal Gold participates in that upside without having to spend 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, Royal Gold would still earn significant cash flow from its royalty streams, and its low overhead and lack of debt will allow it to remain highly profitable. It could then use this cash flow to acquire additional ownership interests in times of low gold prices. The effect of the time value of money should insulate Royal Gold from downside risk to a large degree, since cash flow is purchased at a discount and magnifies reward in the same manner as leverage without actually assuming the risk normally associated with actual leverage. On the other hand, if gold prices were to increase sharply from current levels, Royal Gold would most likely see fewer opportunities for investment and it could then use its strong cash flow to repurchase 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 way that is not present in the typical company. In order to illustrate the effective leverage in the case in which gold increases in value, one might proceed in the following manner. Let us presume a current spot price of $950 that would ten years hence, assuming constant gold prices, result in a cash profit of $600 an ounce. 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 cash profit, i.e. Cp (1 K ) i
(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 assume that at the time of mining ten years hence, the spot price of gold has increased to $1,500 per ounce. The cash profit per ounce is now $1,150 assuming that all other factors are unchanged. The effective return to the investor is the change between the $1,150 cash profit and the $231 effective cost or NPV, which is a ROR of 17.4% per annum. In the former example of a $600 profit per ounce, the ROR is 10%. Thus an increase in the price of 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. the ROR 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 the companys 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 Royal Gold 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
Horizon Research Group, 2009 Page 8

The Contrarian Research Report

constructing facilities to produce both copper and gold from the sulfide portion of the deposit. However, the royalty agreement does not cover copper production. Andacollo has proven and probable reserves of 1.6 million ounces of gold. This reserve estimate was produced with a price of gold of $480 per ounce, so it is likely that the gold reserves that can be produced at the current price of almost $1,000 per ounce will be much higher than that estimate. Conservatively assuming that this estimate will not be revised upward, Royal Gold has the right to 75% of the first 910,000 ounces and 50% of the remainder which, in this case, equates to a total of 1.027 million ounces of gold anticipated to 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 discounted present value of a gold-based earnings stream for a very long period of time, not merely gold 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 in buying the spot. For example, assuming that the gold from the Andacollo mine will be mined in 20 equal increments of 51,375 ounces per year and the price of gold will be constant at $1,000 over the next 20 years, the annual discount rate at which Royal Gold acquired this gold is 17.5%. The Andacollo mine is over 75% complete and is expected to be operational towards the end of the year, so Royal Gold will likely receive significant revenues in less than one year. Royal Gold estimates that it would collect over $32 million per year for the next 20 years (estimated operating life) from this mine alone. This is based on 53,000 ounces of production 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, the discount rate is still 10.2% per year, even though the company used an average gold price that is below current market prices and, perhaps more importantly, the calculation assumes that the reserve estimate will not be revised upward even though gold prices have doubled compared to the price at which the reserve estimate is based. Assuming that the actual gold mined over the next 20 years will be 2.0 million ounces instead of the current estimate of 1.6 million ounces and assuming that the price of gold is steady at $1,000 over the 20-year period, which is a very conservative assumption, the discount rate would be 22.3%. The acquisition 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-, and exploration-stage projects, which explore for gold, silver, copper, lead, and zinc metals. Royal Gold was originally a more broad-based resource company, but it quickly abandoned 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 much less risk by investing in projects operated by other gold mining companies, so it switched
Horizon Research Group, 2009 Page 9

The Contrarian Research Report

to the royalty investment model. At the current time, more than 20 years later, Royal Gold is 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 the companys royalty model is. It is to be noted that the company maintains a strategy of being 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 interests in 8 development stage mines and royalty interests in 25 evaluation stage projects. The gold operators who own and operate the mines in which Royal Gold has invested are generally high quality companies such as Barrick Gold, Goldcorp, Newmont Mining and Anglo Gold. A royalty interest basically entitles the company to a portion of the revenues from 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 value royalty and sliding-scale royalty. In the past year, the company has acquired two significant royalty packages, the first last year from Barrick and more recently from Teck Resources. The Barrick package includes approximately 70 royalties. The following map shows Royal Golds investments:

(Source: Royal Gold)

Horizon Research Group, 2009

Page 10

The Contrarian Research Report

While Royal Gold owns royalty interests in 15 different countries, over 64% of its current gold 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:
As of March 31, 2009 (Amounts in thousands): Cost Accumulated Depletion Net

Production stage royalty interests: Cortez Robinson Taparko Leeville Goldstrike Mulatos Peasquito (oxide circuit) Dolores Siguiri Allan Other Development stage royalty interests: Peasquito (sulfide circuit) Malartic Pascua-Lama Other

10,630 $ 17,825 33,570 18,322 20,788 34,214 4,026 44,878 10,946 22,020 44,068 261,287 95,146 34,031 20,446 30,243 179,866 90,267 531,420 $

(9,116) $ (5,886) (8,380) (7,880) (9,964) (4,175) (373) (128) (2,381) (93) (16,762) (65,138) (65,138) $

1,514 11,939 25,190 10,442 10,824 30,039 3,653 44,750 8,565 21,927 27,306 196,149 95,146 34,031 20,446 30,243 179,866 90,267 466,282

Exploration stage royalty interests Total royalty interests in mineral properties

It is necessary to describe the four forms of economic interest that Royal Gold takes in various mining properties. Gross Smelter Return (GSR) royalty is a defined percentage of the gross revenue from a resource extraction operation, with no deduction for any costs paid by or charged to the operator. Net Smelter Return (NSR) royalty is a defined percentage of the gross revenue from a resource extraction operation, less a proportionate share of incidental transportation, insurance, refining, and smelting costs. There are two built-in advantages to NSR and GSR royalties: 1) some of these contracts are structured on a sliding scale such that the percentage interest escalates as the price of the metal increases. This represents a substantial form of non-debt leverage. 2) Furthermore, Royal Golds royalty interest often applies to a particular section of an area being mined. As the scope of the mining activities often expands further onto the companys royalty lands, the volume of production applicable to Royal Gold can increase far more rapidly than total production.

Horizon Research Group, 2009

Page 11

The Contrarian Research Report

Net Profits Interest (NPI) is a royalty based on profits after allowance for direct production costs, roughly equivalent to cash operating income. Payments do not generally begin until capital costs have been recovered. This form of royalty is therefore far more volatile, since it is sensitive to the costs of production and precious metals prices as expressed in the operating margin. As with the NSR, the royalty 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 the gross revenue from a resource extraction operation less certain contract-defined costs. 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. Between 1.6 and 2.7 million ounces in reserves are covered by Royal Golds four gold royalty interests, consisting of two sliding-scale gross smelter return (GSR) royalties, a fixed-rate GSR 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 royalty rate 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 production from the GAS Claims, an area of interest of approximately 4,000 acres that includes the South Pipeline deposit, but excludes the Pipeline and Crossroads deposits. Royal Gold is currently receiving royalty revenue from all four royalties. The Cortez mine produced 64,000 ounces of gold in the companys fiscal third quarter, a decrease compared to the 117,000 ounces mined in the third quarter of last year as a result of lower grades being mined during the current period. Barrick has announced that it expects 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, for the 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 million compared to $4.4 million in the same period last year as a result of a decrease in copper and gold prices, a decrease in copper sales and negative final pricing adjustments as the significant year-over-year decrease in the price of copper, from an average of $3.52 per pound in the year-ago quarter to $1.56 per pound in this years third quarter, resulted in Quadra having significant negative final pricing adjustments. Furthermore, in this years third quarter, copper sales at Robinson were approximately 34.5 million pounds compared
Horizon Research Group, 2009 Page 12

The Contrarian Research Report

to 38.9 million pounds during the same period last year, which resulted in lower royalty revenue for the period. Taparko (Burkina Faso, West Africa Operated by High River) The Taparko mine commenced gold production in August 2007 and has contributed approximately $14.0 million in royalty revenue since production commenced. The mine has estimated reserves of 800,000 ounces and estimated annual production is 63,000 ounces. However, mill performance has suffered since start-up because of problems associated with the grinding mill drive-train and production actually ceased for 4.5 months last summer until a new gear box to correct the mill problems was installed. Extensive maintenance on the mill was also undertaken during shutdowns in January and in March to reduce 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 sales during the period. Royal Gold holds two initial concurrent production payments, both equivalent to GSR royalties, and two subsequent GSR royalties at the Taparko-Bouroum project, a surface gold operation. The first GSR-equivalent royalty is fixed at a rate of 15.0%. The second GSR-equivalent royalty is a sliding-scale royalty ranging from 0.0% to 10.0%, depending upon the price of gold. The second royalty pays out at a rate of 4.3% when the average monthly gold price ranges between $385 and $430 per ounce. Outside of this range, the royalty rate is calculated by dividing the average monthly gold price by 100 for gold prices above $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 ounces of 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 gold production from defined portions of the Taparko-Bouroum project area, and a 0.75% GSR milling royalty. The latter royalty applies to ore that is mined outside of the defined area of the Taparko-Bouroum project that is processed through the Taparko facilities, up to a maximum 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 Eureka County, Nevada. Royal Gold holds a 1.8% NSR royalty covering a majority of the underground 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 million and 107,000 ounces, respectively.

Horizon Research Group, 2009

Page 13

The Contrarian Research Report

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 surface Goldstrike operation, is operated by Barrick Gold. The estimated reserves covered by this royalty are 5.8 million ounces and the annual production is estimated to be 441,000 ounces. 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%. The royalty 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 are estimated 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 million on 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 project operated by Goldcorp Inc. The Peasquito project, a surface mine composed of two main deposits called Penasco and Chile Colorado, hosts one of the worlds largest gold, silver, and zinc reserves, while also containing large lead reserves. Production commenced in June 2008 from the oxide portion of the deposit. Start-up of the first sulfide circuit is scheduled to begin in the second half of calendar 2009 with production from the second sulfide 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 million pounds of zinc and 7.1 billion pounds of lead. Estimated royalty production is 70,000 ounces of gold and 2.3 million ounces of silver. Based on current metal prices, the average annual royalty revenue would be approximately $22 million over the first 10 years of production. 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 silver production from the Dolores project, a surface gold and silver mine. Initial production and associated royalty revenue from the 1.25% NSR royalty commenced in the fourth quarter of 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 during Royal Golds fiscal third quarter, resulting in gold royalty revenue of $200,000. The companys royalties cover an estimated 2.44 million ounces of gold and 126.7 million ounces of silver. Production is estimated to be 100,000 ounces of gold and 2.0 million ounces 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
Horizon Research Group, 2009 Page 14

The Contrarian Research Report

of approximately $12.0 million. As of March 31, 2009, approximately $9.3 million remains 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 property generated revenues of $1.3 million on 80,000 ounces of production compared to nothing in the prior years third quarter. Allan (Saskatchewan, Canada Operated by Potash Corp.) The Allan mine is an underground mine located approximately 24 miles east of Saskatoon near the town of Allan, Saskatchewan. The companys royalty applies to 40% of production. 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 surface mining operation. Royal Gold holds a 2.0% - 3.0% sliding-scale NSR royalty on the Canadian 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 half of the royalty. Estimated reserves are 4.7 million ounces and production is expected to start in 2011. Pascua-Lama (Region III, Chile Operated by Barrick Gold) Barrick Gold has received key construction permits and environmental approvals and Chile and Argentina have reached a tax agreement on the mine. Barrick expects commissioning in 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 mine holds reserves of 17.8 million ounces of gold and 718 million ounces of silver, and has a mine life of greater than 25 years. Average production over the mine life is estimated to be 600 to 700,000 ounces of gold and 20 to 25 million ounces of sliver at a total cash cost of 200 to $250 per ounce. Production rates in the first five years are higher and cash costs are notably lower. This higher grade is mined earlier in the mine life. Royal Gold holds a 0.16% - 1.08% sliding-scale NSR royalty on the Pascua-Lama project, currently paying out 1.08% based on current gold prices. The NSR royalty is applicable to all gold production from an area of interest in Chile. Royal Gold also holds a 0.216% fixed-rate copper royalty which applies to all of the copper reserves in Chile within the area of interest, but does not take 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 from Barrick Gold, it acquired a royalty on a portion of the development stage Holloway-Holt mining project in Ontario. St Andrew succeeded Newmont Canada as owner of the Holloway-Holt mining project in November 2006 and, by virtue of Royal Golds acquisition of Barricks royalty portfolio, it succeeded Barrick as the royalty payee under the royalty agreement. The estimated reserves covered by this royalty are 487,000 ounces
Horizon Research Group, 2009 Page 15

The Contrarian Research Report

of gold. Production is not expected to start until after 2010. The royalty percentage is based on 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 $20.8 million. 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 production from the recently acquired Barrick royalty portfolio, an increase in production at Taparko and commencement of production at Peasquito and Dolores. These increases were partially offset by a decrease in gold and copper prices and a decrease in production at Robinson 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 Taparko mine added at another $5.1 million in revenue, up from $3.1 million in the year-ago quarter, and the company received about $3.6 million from the royalty interest that it acquired in October 2008 from Barrick Gold. Combined, these revenue streams more than offset 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 period while Robinson generated $1.8 million in this years third quarter compared to $4.4 million in 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 a decrease in copper and gold sales. In the third quarter, Royal Golds gold production contributed to 89% of its total royalty revenue, 3% of its total royalty revenue came from silver royalties and 8% of its total revenue from other metal royalties. For the remainder of this calendar year, increased revenues from Dolores and Peasquito are expected, as those properties continue to ramp up production. For the quarter ended March 31, 2009, the price of gold averaged $908 per ounce compared to $925 per ounce in the third fiscal quarter of 2008, while the price of copper averaged $1.56 per pound in this years third quarter compared to $3.52 per pound in the same quarter in the prior year. Therefore, Royal Gold exceeded last years financial performance in a declining pricing environment. The table on the next page outlines revenues and production for each mine:

Horizon Research Group, 2009

Page 16

The Contrarian Research Report

Royalty Revenue and Production Subject to Royalty Interests

Metal(s)/ Element Three Months Ended March 31, 2009 Royalty Reported Revenue Production Three Months Ended March 31, 2008 Royalty Reported Revenue Production

Royalty

Taparko Cortez Mulatos Robinson Leeville Siguiri Goldstrike Peasquito (oxide) Dolores Other Total Royalty Revenue

Gold Gold Gold Gold Copper Gold Gold Gold Gold Silver Gold Various

$ $ $ $ $ $ $ $ $ $ $

5,091 3,758 1,875 1,849 1,731 1,292 1,114 361 161 3,565 20,797

22,963 oz. $ 63,956 oz. $ 41,871 oz. $ $ 30,257 oz. 34.5 million lbs. 106,767 oz. $ 79,836 oz. 136,733 oz. $

3,132 5,313 449 4,384

14,224 oz. 116,749 oz. 32,081 oz. 32,313 oz. 38.9 million lbs. 113,685 oz. N/A 145,369 oz. N/A N/A N/A N/A N/A

1,865 N/A 1,195 N/A 12,027 oz. N/A 0.6 million oz. N/A 14,169 oz. N/A N/A $ 2,393 $ 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 2-3 years. This will be offset, to a limited extent, by some attrition at its existing mines, so annual revenues should rise from around $70 million in fiscal 2009 (ended June 30) to perhaps $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 and administrative expenses fell to $1.8 million for the third quarter, compared to $2.0 million for the prior years third quarter as a result of the elimination of the non-recurring general corporate costs associated with the conversion of all of Royal Golds preferred stock in January 2008. Exploration and business development expenses decreased to $0.7 million for the third quarter of 2009, from $0.8 million for the same quarter last year as a result of a 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 per share, in the third quarter of 2009, compared to $3.3 million or $0.11 per share for the third quarter of fiscal 2008, mostly as a result of the absence of $3.6 million in preferred dividend 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 any further obligations to pay for operating or capital cost, it still recognizes DD&A costs, and these costs increased to about $10.0 million for the third quarter, compared with $5.9 million for the comparable quarter last year.
Horizon Research Group, 2009 Page 17

The Contrarian Research Report

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 depletion during the third quarter. These increases were partially offset by a decrease in production at 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 to the $15.5 million reported for the same period last year. As a percentage of revenue, this free cash flow represented 84% of revenues in this years third quarter compared to 83% in the 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 proceeds from the companys recent equity offering. We note that approximately $218 million has been set aside for the closing of the Andacollo transaction.

Horizon Research Group, 2009

Page 18

The Contrarian Research Report

Valuation Comparative Valuation Stocks of royalty companies tend to be somewhat expensive, if based on traditional valuation measures, relative to both large and small gold mining companies, as the table below indicates:
EV/ 2010 OCF 16.2x 8.9x 16.9x 11.3x 13.3x 11.5x 21.3x 9.9x 10.7x 5.3x 7.8x 10.0x 8.8x 8.0x EV/ 2010 Sales 11.2x 6.7x 14.5x 7.0x 9.8x 4.0x 8.7x 3.1x 4.0x 2.5x 3.4x 3.7x 2.3x 3.0x Price/ Book 3.3x 1.0x 2.1x 3.1x 2.4x 3.2x 2.0x 1.9x 1.8x 1.6x 5.4x 5.7x 5.4x 4.5x 2009 Est. Net Profit Margin 39.0% 21.6% 20.4% 49.1% 32.5% 22.1% 20.8% 18.1% 15.3% 22.0% 28.4% 20.2% 20.0% 22.6% 2009 Est. EBITDA Margin 87.4% 68.2% 87.4% 65.6% 77.1% 43.0% 49.9% 44.2% 34.3% 42.2% 49.4% 41.0% 11.3% 36.0% Market Cap. (millions) $1,692 $300 $2,768 $2,684

Company Royal Gold Intl Royalty Franco-Nevada Silver Wheaton Ave: Barrick Gold Goldcorp Newmont Mining Ave: Gammon Lake Aurizon Mines Jaguar Mining Great Basin Gold Ave:

Symbol RGLD ROY FNV.TO SLW

Price $41.58 $3.42 $26.94 $9.32

ABX GG NEM

$36.50 $39.00 $42.00

$31,901 $28,509 $20,580

GRS AZK JAG GBG

$7.01 $3.85 $8.72 $1.44

$862 $612 $680 $480

However, royalty companies generate significantly more free cash flow than the gold mining companies. In fact, the royalty companies generally convert around 70% of revenues into free cash flow while gold mining companies generally reinvest most or all of their 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 averages for the large and small gold mining companies. In fact, Royal Golds operating cash flow accounted for 59% of revenues in FY2008, compared with 24%, on average, for North American 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 invested in Franco-Nevada in 1983 would have been worth approximately $1,250,000 today (assuming that an investor held Newmont mining shares while that company owned Franco-Nevada earlier in the decade and repurchased the Franco-Nevada shares when it was spun out). We note that all four royalty companies have traded at valuations of 25x cash flow, or more historically, so the current situation clearly represents a discount to historical levels.
Horizon Research Group, 2009 Page 19

The Contrarian Research Report

Reserve Valuation Traditionally, gold companies are valued primarily based on their reserves, rather than sales, earnings or cash flow. However, this is a potentially misleading method since reserves 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. A reasonable objective measure might then be ounces of metal per price of a given share. For Royal Gold, its ratio of gold ounces to its enterprise value is approximately 1.9x (following the Andacollo acquisition) whereas larger gold companies such as Newmont Mining and Barrick Gold have ratios of approximately 4.1x and 4.3x, respectively. However, Royal Gold does not have to pay overhead, capital expenditures or any legal/environmental liability, 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 net present value of the cash flow to be received over the reserve lives of the mining properties in question. The problem arises in the estimation of the cash flow. The prices of precious metals in the future are obviously unknown. The production schedules in any given time period are also unknown, although estimates are likely to be far more accurate than projections of precious metals prices. Finally, the discount rate chosen will be subjective to some degree. Consequently, one might avoid the problem by introducing the imaginary device of a terminal payment. In other words, let us falsely presume that metals prices will not change during 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 of the trust are to be distributed when the mines are thoroughly exhausted, and this will be estimated to be in 20 years. Thus, the problem is unrealistically reduced to the payment of a sum today (purchase of shares) in exchange for the payment of a sum in the future. Since no reinvestment return is generated on cash flow for 20 years and no increase in precious metals prices is assumed, this methodology should be conservative and should err on the side 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 price is $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 of the mines in which it has invested and multiplying it by the current royalty rate, according to the table below:

Horizon Research Group, 2009

Page 20

The Contrarian Research Report

Proven and Probable Gold Reserves Property Bald Mountain Cortez Operator Barrick Barrick Royalty Type NSR GSR1 GSR2 GSR3 NVR NSR NSR NSR NSR GSR1 GSR2 GSR3 NSR GPR NSR NSR NSR NSR NSR NSR NSR NSR NPI NSR A$10/ounce NSR NSR NSR NSR Rate 3.75% 5% 5% 0.71% 0.39% 2% 3% 0.9% 1.8% 15% 10% 2% 2% 2% 2% 5% 1.875% 3.25% 3% 4% 1.08% 2% 12.35% 7.50% 0.72% 0.88% 1.50% 3% 3% 3% Total 75% 50% Reserves (millions) 0.72 1.587 2.674 2.033 1.592 0.46 0.905 5.768 2.518 0.262 0.262 0.544 0.683 0.08 17.43 2.05 3.25 2.44 4.727 0.913 14.615 0.3 0.487 0.207 0.752 0.308 0.026 0.284 0.174 0.06 64.223 0.91 0.69 Pro-rata Share (mil) 0.027 0.079 0.134 0.014 0.006 0.009 0.027 0.052 0.045 0.039 0.026 0.011 0.014 0.002 0.349 0.102 0.061 0.079 0.142 0.037 0.158 0.006 0.060 0.016 0.005 0.003 0.000 0.009 0.005 0.002 1.519 0.683 0.345 1.028

Gold Hill Robinson Goldstrike Leeville Taparko

Kinross/Barrick Quadra Barrick Newmont High River

Marigold Twin Creeks Peasquito Mulatos Siguiri Dolores Canadian Malarctic El Chanate Pascua Lama Warf Holt-Holloway Pine Cove Williams Meekatharra Balcooma El Toqui El Limon Don Mario

Goldcorp/Barrick Newmont Goldcorp Alamos Anglo Gold Mine-finders Osisko Mining Capital Gold Barrick Goldcorp Goldfields New Island Barrick Mercator Gold Kagara Breakwater B2Gold Orvana

Andacollo

Teck (Acquisition not completed yet)

It should be remembered that the cash flow derived from precious metals sales is a royalty interest and therefore has a very substantial cash flow margin unlike that of other gold companies. In fact, Royal Golds free cash flow margin is generally around 70% while major gold companies not rarely have negative free cash flow as a result of their significant capital expenditures. In this case, one could apply a 70% cash flow margin to the sum of
Horizon Research Group, 2009 Page 21

The Contrarian Research Report

$1.52 billion gold revenue and $333 million platinum revenue and $110 million copper revenue 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 sheet approximately $300 million in cash and marketable securities, after its recent secondary offering. Since the terminal payment notion effectively presupposes liquidation mode, it would be logical to anticipate that this $300 million would be distributed at the time of payment. In this instance, it would be far too draconian to assume that no return had been earned upon this sum. A 5% compound annual return assumption for a period of 20 years would 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 represents a return of 1.25% per annum. It can be then said that based upon the assumptions of 1) no reinvestment 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 Mine If 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 and probable reserves of 1.6 million ounces of gold. However, these reserves were estimated using a gold price of $480. As the current price of gold is approximately twice of that, the reserves are likely substantially higher. Assuming that a revised estimate from Andacollo would result in a 30% boost to reserve figures, which may be conservative given the current price of gold, that mine would have proven and probable reserves of 2.08 million ounces 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 approximately 2.55 million ounces of gold, which is currently worth $2.45 billion, in addition to its $333 million of silver and $110 million of copper for a total value of $2.9 billion. Using these figures, and adding the future value of approximately $100 million left in cash once the Andacollo transaction closes, the terminal payment, as calculated above, would come out to $2.29 billion, compared to the current $1.65 market capitalization. Consequently, the terminal 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 equity that it is expected to earn, on average, over the next two years. One could divide the $2.9 billion of precious metals cash flow, following the Anadacollo transaction, into 20 equal increments and apply it to the annuity formula in order to determine the amount of money that would be earned assuming reinvestment. The annuity formula is as follows:
V P (1 R / K ) KN R/K 1

Horizon Research Group, 2009

Page 22

The Contrarian Research Report

where V = value at the end of the period P = amount invested on an annual basis R = rate of return on investment K = number of compounding periods N = number of years The division of $2.9 billion into 20 equal increments suggests $145 million of cash flow on average, which is much more than is currently received. In order to weight the figures to the future years, one could presume an average of $100 million for the first 10 years and then $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:

$100,000

(1 0.05 / 1)10 1 0.05 / 1

$1,257,789,000

This would then compound at 5.0% until, at the end of year 20, it would be worth $2.05 billion. The second stream of cash flow would be $190 million per annum that would compound at 5.0% from years 11-20. This would be worth $2.641 billion at the end of year 20:

$190,000

(1 0.05 / 1)10 1 0.05 / 1

$2,389,800 ,000

At the end of 20 years, Royal Gold should have accumulated wealth that is roughly equal to the sum of A) $265 million, which is the cash and marketable securities at 5%, B.) $2.05 billion 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 ten years. 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 of 5.4% The Derivation of a Superior Rate of Return It could be argued that Royal Gold has the margin of safety requirements necessary to qualify as a Graham and Dodd investment. However, the objective of a value investor is to earn a superior return with below average risk. Nothing that has been stated thus far suggests an above average rate of return. Obviously, the catalyst needed to increase the return offered by these shares to a level beyond a bond return is an increase in gold prices.
Horizon Research Group, 2009 Page 23

The Contrarian Research Report

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 the presumed inflation level of 3% per annum would likely carry the return to double digit levels, as a gradual increase in gold prices would also gradually increase the volume of reserves that would be considered economic. Thus, a very attractive return can be generated. Of course, if a much more pronounced rise in price does occur with regard to gold or precious metals in general, then the return to shareholders could be quite substantial. In essence, Royal Gold is a security that should provide a bond-like return in the absence of rising gold prices and outstanding returns in the case of increasing gold prices. If gold prices increase, the price appreciation of Royal Golds shares should be much more pronounced than the gold price increase due to the leverage built into its discounted 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 capture value in the precious metals sector without incurring many of the risks associated with mining operations, such as capital costs, operating costs, and environmental liabilities. The distinction between a royalty company and a mining company is very important in the current market environment in which the costs to build and operate mines are rising significantly. 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 shareholders with a premium precious metals exposure in a lower risk vehicle. Additionally, Royal Gold provides investors with valuable leverage to improving gold prices with sliding-scale royalties, while lowering its risk from decreasing gold prices through fixed rate royalties and floors on its sliding-scale royalties. The royalty streams purchased by Royal Gold are discounted to reflect the time value of money. Since they are based on gold production, Royal Gold can be said to own huge volumes of gold at deeply discounted prices. Of course, the discount can only be recovered over time. However, the mathematical consequences of the discount to the investor are highly 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 an increase in gold prices, the impact on return is as if one were leveraged, whereas no leverage is actually undertaken. A very small boost in gold prices can result in a very significant change in value of the shares of this enterprise. On the other hand, the nature of the enterprise hedges the investor against many of the risks normally associated with the ownership of gold. Consequently, the shares of Royal Gold represent a low risk/high reward mechanism to invest in gold. These asymmetrical return features are sufficiently alluring such that purchase of the shares is currently recommended.

Horizon Research Group, 2009

Page 24

The Contrarian Research Report

ROYAL GOLD, INC. Consolidated Balance Sheets (Unaudited, in thousands except share data)
March 31, 2009 June 30, 2008 (As Restated)

Current assets Cash and equivalents Royalty receivables Income taxes receivable Deferred tax assets Prepaid expenses and other Total current assets Royalty interests in mineral properties, net Restricted cash compensating balance Inventory restricted Other assets Total assets Current liabilities Accounts payable Dividends payable Other Total current liabilities Net deferred tax liabilities Term loan facility Other long-term liabilities Total liabilities Commitments and contingencies Minority interest in subsidiary Stockholders equity Common stock, $0.01 par value, authorized 100,000,000 shares; and issued 33,958,082 and 33,926,495 shares, respectively Additional paid-in capital Accumulated other comprehensive (loss) income Accumulated earnings Total stockholders equity Total liabilities and stockholders equity

$ 50,538 18,248 2,038 91 1,429 72,344 466,282 19,250 11,052 5,786 $574,714

$ 192,035 16,317 2,186 131 308 210,977 300,670 15,750 11,170 7,283 $ 545,850

$ 5,702 2,738 2,135 10,575 23,468 19,250 688 53,981

4,753 2,384 1,797 8,934 26,034 15,750 504 51,222

11,416 340 466,100 (32) 42,909 509,317 $574,714

11,411 339 463,335 65 19,478 483,217 $ 545,850

Horizon Research Group, 2009

Page 25

The Contrarian Research Report

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 Costs and expenses Costs of operations (exclusive of depreciation, depletion and amortization shown separately below) General and administrative Exploration and business development Depreciation, depletion and amortization Total costs and expenses Operating income Interest and other income Interest and other expense Income before income taxes Income tax expense Minority interest in income of consolidated subsidiary Net income Adjustments to comprehensive income Unrealized change in market value of available for sale securities, net of tax Comprehensive income Net income Preferred dividends Net income available to common stockholders Basic earnings per share Basic weighted average shares outstanding Diluted earnings per share Diluted weighted average shares outstanding

20,797 $

18,731

1,154 1,812 732 9,960 13,658 7,139 1,075 (266) 7,948 (2,534) (1,272) 4,142 $

1,006 1,981 817 5,925 9,729 9,002 1,715 (330) 10,387 (3,358) (140) 6,889

$ $ $ $

(24) 4,118 $ 4,142 $ 4,142 $ 0.12 $ 34,008,758

(109) 6,780 6,889 (3,584) 3,305 0.11 30,932,084 0.11 31,213,663

0.12 $ 34,447,169

Horizon Research Group, 2009

Page 26