GENERAL39208

• Permit No: M1982090
• IBM Index Class Name: General Documents
• Doc Name: ROYAL RESOURCES CORP ANNUAL REPORT 1986
• Annual Report Year: 1986
• Media Type: D
• Archive: No

Liquidity and Capital Resources
Fiscal year ended tune 30, 1986
The Cumpany generally funds its operations through existing
working capital and from funds provided by operations.
Durng the year ended June 30, 1986 the Cumpany
generated $100,000 from operations. A total of $"_'.5 million
were expended on oil and gas properties and approximately
$350,000 were .pent on gold mining properties, including
$300,000 held in exrow at lone 30, 1986 for the Colosseum
Mine as described in Item Ltd, "Gold Alining" In addition,
the Cumpany has devoted a significant portion of
administrative effort to the gold mining ventures. As a result
of these expenditures, working capital, which stood at $1.7
million at year end, decreased by $2.1 million during the
year. The Company decreased its accountr, payable by
$1.5 million in 1986 while receivables decreased by
approximately $450,000. The Company reduced ifs cash and
marketable securities by approximately $3.2 million to fund
its operations in fiscal 1986.
The Cumpany has a credit arrangement with the United
Bank of Denver, N.A. Under the credit agreement, the bank
periodically determines a burrowing base based on its
evaluation of the Company's collateral, primarily oil and gas
reserves. Currently the Company's maximum borrowing base
Is $2,750,000, down from a $7 million borrowing base in
effect in lone 1985. The next bank evaluation is scheduled
for November 1986. The Company cannot predict what
the bank's evaluation will be at that time. The line is
collateralized by certain of the Company's oil and gas
properties and a $150,000 certificate of deposit. At tune 30,
1986, $260,000 of debt was outstanding. The Cumpany
plans to utilize this credit line to finance its gold mining
ventures including part of the cost of the purchase of the
Colosseum Mine property. Under the credit agreement, the
Company is restricted from additional long-term financing
and must satisfy certain financial tests. See Note 3 to
Consolidated Financial Statements.
Because of the substantial declines in oil and gas prices
that have occurred in 1986, the Company has or is
attempting to curtail substantially allot its (.Manned
expenditures for oil and gas in fiscal 1987. In addition, the
Company will continue its efforts to reduce general and
administrative expenditures relating to oil and gas
operations.
Absent further changes In the oil and gas markets, the
Company anticipates net operating revenue. from oil and gas
to approximate $2.3 million in the 1987 fiscal year. Based
upon current levels of oil and gas operations, general and
administrative expense. for oil and gas operations would he
approximately $1 million during the next fiscal yeas Excess
funds generated from oil and gas operations are being used
to partially finance the Company's entry into the gold mining
business. The Cumpany"s commitment for the 1987 fiscal
year for the Camp Bird Mine totals approximately $330,000.
Other commitments will attach to the Colosseum project
when it closes. If there are further decreases in the prices
received by the Company for its oil and gas production ur if
currently unforeseen circumstances were to reduce the
quantities of oil and gas produced by the Company, the
Company v.~ould he required to further draw down its
available working Capital and further reduce its operations
including general and adminlstrative expenditures.
The Company is invectigaung various alternatives (or
raising capital for ib gold mining ventures. The Company has
engaged an im~esiment banking firm in connection with a
proposed private placement of a sub>tantial portion of the
Company's mining subsidiary's capital stock to third parties.
It this ol(ering is completed, the Company anticipates further
capital infusions into RGI will be reduced or eliminated. It
this offering is completed and other ahernatives are not
available, the Company's gold activities will be curtailed.
In connection with the Colosseum project, the
Company and its joint venture partners are negotiating fur a
gold bullion loan to finance the construction of the mine and
mill. The proposed terms of this loan provide for 100 percent
financing wish interest, fees and other carrying costs of about
4.1 percent per annum and a five year repayment period.
Repayment will be made in gull from mine production
which would also serve as collateral iur the loan. The
Company contemplates using Chi, financing vehicle for suture
gold mining ventures.
Impact of Changing Prices and Operating Costs
During fiscal 1986, oil prices received by the Company
decreased on the average of approximately 18 percent. The
decreases in the year-end prices are more dramatic and
represent a decrease of 53 percent from 1985 average prices.
The decrease in the price per MCF crl gas on the average and
at fiscal year-end amounts to 22 percent and 31 percent
respectively. The year-end decrease in gas pricing is nut as
dramatic as the oil price drop but has contributed
significantly ro the erosion in the Company's revenues, cash
flow and estimated future revenues from reserves.
The Company anticipates a firming to slight increase in
the prices for crude during the coming liscal year. The
Company also anticipates a continued weakening of gas
pricing for the coming fiscal year. On a balance, the
Company expects prices for [he fiscal year 1987 to be
somewhat consistent with (he prices in effect during the last
half u( 1986. However, oil and gas markets have been
extremely volatile recently so it is c4fficult to predict with any
degree of certainty what will happen to oil and gas prices.
During the past liscal year, the Company experienced a
significant increase on a per equivalent barrel basis in the
operating expenses for its properties. In fiscal 1986, operating
costs amounts to 38 percent of oil and gas revenue as
compared 1u 14 percent in 1985. This increase resulted from
a number of factors including the decrease in product prices,
the trailing of expense reduction fullowhig revenue
reduction, the lagging of adjustments in ad valorem taxes
based on lower product prices and significant workover
expenditures in 1986 at Tulare Lake. The Company
anticipates a reduction in the proportion of operating costs
to revenue in the coming fiscal year because rt believes
operating expenses are coming more in line with revenues
and certain expenses li.e., workover cots at Tulare) will not
be repeated at 1986 levels. The Company will continue its
efforts to v,~ork with operatnrc of join[ properties to reduce
operating costs.
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