Dear Shareholders,

While there is much uncertainty in the world financial markets and global macroeconomic environment, Royal Gold is well positioned to prosper. We remain completely focused on gold.

Mounting debt and deficits in western world countries continue to be at the forefront of fiscal policy. Fiat money supply continues to expand at rates unmatched in recent history. At the same time, global gold production has remained relatively flat, only increasing about 3% in 2011. Gold has once again reestablished itself as a currency, as a store of value against the oversupply of paper currencies, and as a credible portfolio diversification investment. Not only are individual investors attracted to gold to retain wealth, but governments are also now adding gold to their reserves as a substitute for devaluing paper currencies. And excessive government debt and deficit spending are not likely to end anytime soon.

Against this macroeconomic backdrop, we have seen an interesting disconnect between gold equities and the price of gold. Rising input cost pressures and lower grade ore have translated into higher operating costs and reduced margins for the industry in general. The cash cost to produce an ounce of gold increased 18% to $729 over the 12-month period ending June 30, 2012 (before considering capital expenditures, income tax, and investment profit requirements). At the same time, capital costs have continued to rise tremendously which has caused return on investment concerns for new projects. These issues and others have resulted in generally poor share price performance for the industry.

In contrast, Royal Gold stood apart from general gold equities during the year due to our business model. Our investments in projects are fixed and are not subject to rising capital and operating costs. We are not responsible for the operation of mines, which keeps our employee count and operating expenses in check. As a result, our margins continue to expand as the price of gold increases. The market recognized our lower risk business model during the fiscal year as our share price increased 34% while the Philadelphia XAU index, an index of 30 gold and silver equities, decreased 20% during the same period.

This share price performance was underpinned by record financial results. Fiscal 2012 revenues of $263 million, earnings of $93 million and $238 million in Adjusted EBITDA* each reached new highs in our corporate history and were 22%, 30% and 25% higher, respectively, than fiscal 2011. Effective cost control continued as we added business interests without needing to increase our staff, allowing 90% of revenue to report to Adjusted EBITDA.

These record financial results were derived from our interests in 39 active mining operations. This large number of revenue sources provides important diversification and helps stabilize our performance.

Our five cornerstone assets include interests in the Andacollo mine in Chile, the Peñasquito mine in Mexico, the Voisey’s Bay mine in Canada, the Mt. Milligan project in Canada, and the Pascua-Lama project in Chile. These properties are either in their early years of production or later phases of development and have expected mine lives in the range of two decades. Geopolitical stability is critical in our business and we are pleased to have constructed a portfolio where 87% of our fiscal 2012 revenues were derived from North America and Chile. On a reserve basis, 97% of our interests are domiciled in North America and Chile.

Andacollo was again our largest revenue source, contributing $64 million or 24% of total revenue in fiscal 2012. The improved financial performance was due to continued ramp up of production towards full design capacity. During the year, the mine operated at approximately 44,000 tonnes per day whereas the design capacity is 55,000 tonnes per day. Teck has installed additional crushing capacity to improve overall plant throughput and is in the process of commissioning this new facility.

Likewise, Peñasquito revenue increased to $29 million or 11% of total revenue during the year as the operation advanced its production ramp up. Goldcorp completed the installation of additional crushing capacity near the end of the March quarter to obtain the design capacity of 130,000 tonnes per day. However, in June, the impacts of a severe drought caused the plant to reduce production due to water shortages. Once the proper water balance is restored, it is expected that the mine will attain design capacity for the second half of fiscal 2013.

Voisey’s Bay operated consistently throughout the year, providing $36 million or 14% of total revenue for fiscal 2012. Vale advanced the construction of a new hydromet processing facility located in Long Harbor, Newfoundland to process the Voisey’s Bay concentrates, and they expect to commission the multi-billion dollar project during calendar 2013.

The construction of Pascua-Lama continued and by our fiscal year end Barrick invested $3.0 billion. Barrick expects the project will cost $7.5 to $8.0 billion, with gold production expected in mid-2014.

Construction at Mt. Milligan advanced significantly during the year as well. As of June 30, 2012, Thompson Creek reported that overall progress was 69% complete, having invested $757 million with approximately $760 million in capital expenditures remaining through the end of calendar 2013. Thompson Creek expects the mine construction to be completed in late calendar 2013 at a total anticipated cost of approximately $1.5 billion.

We are eager to see production commence at these properties as we expect the magnitude of revenue from each of Pascua-Lama and Mt. Milligan, at current gold prices, will surpass any other individual asset now in production. The solid performance of our three operating cornerstone interests, coupled with the near term growth from Pascua-Lama and Mt. Milligan, will provide a robust, stable and long lived foundation for years to come.

During fiscal 2012, we added three new business interests. In early December, we expanded our interest at Mt. Milligan with an additional commitment of $270 million which increased our interest in gold production from 25% to 40%. In mid-December, we purchased the right to acquire 12.5% of gold production and 22.5% of silver production from the development stage Tulsequah Chief project, also in British Columbia, for a total commitment of $60 million. And, in May we acquired a 3% net smelter return royalty on Barrick’s operating Ruby Hill mine in Nevada for $38 million.

In August 2012, after our fiscal 2012 year end, we acquired an additional 12.25% of the gold stream interest at Mt. Milligan for $200 million, bringing our total gold stream interest to 52.25%.

We are uniquely positioned to enter into additional new business opportunities. Companies anxious to develop projects are looking for alternatives to equity and debt financing. Given that gold equities are trading at historically low multiples, companies are not interested in financings associated with excessive equity dilution. Debt is also becoming more limited and expensive for many.

Given these trends over the last year, we repositioned our Company to take advantage of potential future opportunities. We completed a $268 million equity financing on attractive terms in January to fund the Mt. Milligan and Tulsequah Chief transactions. We took a second step in May by expanding our credit facility to $350 million and extending its term to five years. The final step was completed in June by adding fixed, low cost debt to our balance sheet via a $370 million convertible notes offering, leaving us with liquidity of approximately $725 million, including cash on hand and our undrawn credit facility, as of fiscal year end.

"Royal Gold stood apart from general gold equities during the year due to our business model.”

We have paid a dividend every year since 2000 and are proud to have increased the dividend each year since 2001. In fiscal 2012, we increased the dividend 36% to $0.60 per share. Since 2000, our compounded annual growth rate in our dividend has been 23%.

I would like to take this opportunity to thank Mr. Don Worth for his many years of exceptional service to Royal Gold as a director since 1999. Don epitomizes the characteristics we at Royal Gold strive to achieve in our business dealings. In anticipation of Don’s retirement last November, we asked Gordon Bogden to join the Royal Gold board of directors in August 2011. We are very pleased to have attracted Gordon to our Company and we have already benefited from his extensive financial, technical and industry experience.

Your Company is managed by only 20 employees which results in an incredible ratio of market capitalization per employee. While extremely efficient, this lean staffing requires a very strong personal commitment from each member of our interdisciplinary team. Each individual plays an important role in our success and I would like to sincerely thank them and acknowledge their efforts.

Finally, it is an honor to serve the needs of Royal Gold and on behalf of all of our employees, we thank you for the opportunity to do so and for your support of our efforts.

Sincerely,

Tony A. Jensen

 

* Adjusted EBITDA is a non-GAAP measure. See here for more information.