There are basically three ways to add gold to your portfolio: (1) buy gold bullion or coins, (2) buy shares of a gold mining company, and (3) buy shares of a company that's a streaming and royalty company. And while the value of all three of these investments will be tied to the price of gold which is affected by the economy and the value of the dollar, streaming and royalty payments may be the best of the three investments. And that's what Royal Gold does.
Royal Gold, Inc. acquires and manages precious metals royalties, metal streams, and similar interests. It focuses on acquiring stream and royalty interests or to finance projects that are in production or in development stage in exchange for stream or royalty interests. As of June 30, 2016, the company owned stream interests in 4 producing property and 3 development stage properties; and owned royalty interests in 34 producing properties, 21 development stage properties, and 131 exploration stage properties. Its principal producing stream and royalty interests on properties are located in the United States, Canada, Chile, Mexico, the Dominican Republic, and Ghana. The company also holds stream and royalty interests in mines and projects in other countries, including Argentina, Australia, Bolivia, Brazil, Burkina Faso, Finland, Guatemala, Honduras, Macedonia, Nicaragua, Peru, Russia, Spain, and Tunisia. Royal Gold, Inc. was founded in 1981 and is based in Denver, Colorado.
(Summary) (Company) (Chart)
11 January 2016
1yr Target $86.13
Payout Ratio ---
1yr Cap Gain 29.18%
1yr Tot Return 30.61%
EPS (ttm) $-0.04
EPS next yr $2.19
Forward P/E 30.48
EPS next 5yr 36.20%
1yr Price Support $79.71
Market Cap $4.46 Bil
Revenues $403.70 Mil
Earnings $-2.03 Mil
Profit Margin ---
Quick Ratio 7.00
Current Ratio 7.50
1yr RevGR 29.41%
3yr RevGR 7.47%
5yr RevGR 10.69%
1yr EarnGR ---
3yr EarnGR ---
5yr EarnGR ---
1yr DivGR 4.59%
3yr DivGR 6.58%
5yr DivGR 16.72%
Royal Gold's principal activity is the acquisition and management of precious metal royalties and similar interests, including precious metal streams. By partnering with capable operators, the company focuses on building and managing a diversified, cash-flowing portfolio of precious metal assets.
Royalties and streams can be acquired outright from either a resource company or a private party. New royalties are created by providing capital to an operator or explorer in exchange for a royalty. Precious metal streams are obtained by providing financing to operators, allowing them to monetize a portion or all their precious metal production. In either case, the capital provided by Royal Gold is typically used for the development and construction of a mine, mine expansion, or funding exploration work.
Benefits to Investors
There are several ways to invest in precious metals. Options and associated risks range from the direct purchase of gold and silver bullion or ETF funds to investments in mining and exploration equities.
Royal Gold was designed to be a unique and lower risk investment opportunity while retaining upside value. Five key advantages to their business model include: portfolio diversification, no-cost exploration upside, geopolitical stability, fixed-cost investments, and inherent growth.
- Portfolio Diversification: Royal Gold owns a large portfolio of interests in high-quality, long-life mines, development projects, and evaluation and exploration properties. Their portfolio of revenue generating assets consists of nearly 40 producing properties, with the majority of our revenue generated from mines owned by some of the largest mining companies in the world. In comparison, most mid-tier mining companies have five to ten mines in their operating portfolio at any given time. Royal Gold’s large portfolio provides a level of financial and production stability.
- No-Cost Exploration Upside: Royal Gold enjoys the benefit of reserve growth, as operators seek to extend mine lives by exploring for additional reserves at their existing mine sites. With the exception of the Peak Gold joint venture, Royal Gold is not required to participate in the exploration expense or pay any additional compensation when operators discover or add additional reserves at existing mines.
- Geopolitical Stability: Many mining companies have assumed increased political risk as they turn to less stable countries in their quest to replace depleted reserves. As of June 30, 2016, over 90% of the company's net gold equivalent ounces of production were located in the host countries of Canada, Mexico, the Dominican Republic, Chile and the United States.
- Fixed-Cost Investments: Royal Gold does not have to contribute to capital or operating costs at the mining operations in which they have an interest. Therefore, Royal Gold is not exposed to inflationary pressures that can erode the rate of return expectations and profit margins of operating mining companies.
- Inherent Growth: In addition to the company's large portfolio of producing assets, in FY2016 they owned interests in 24 additional properties where reserves have been identified and efforts are being made to develop the properties. The company holds a significant development interest at Barrick’s Pascua-Lama project located on the Chilean Argentine border. New Gold's Rainy River project in Ontario, Canada, is in development and is expected to contribute to Royal Gold's growth profile once production commences in 2017.
The combination of a strong balance sheet, solid cash flow and freedom from managing mine operations allows the company to focus on identifying additional accretive business opportunities.
A metal stream is an agreement that provides, in exchange for an upfront deposit payment, the right to purchase all or a portion of one or more the precious metals produced from a mine, at a price determined for the life of the transaction by the purchase agreement. Metal stream acquisitions are often larger in size than royalty acquisitions, have more flexibility in the negotiation of terms and conditions, and generally provide both parties with tax advantages. The creation of precious metal streams on base metal mines offers additional opportunities for Royal Gold to add precious metal revenue to its portfolio, beyond seeking royalties on mines that produce primarily precious metals.
An example of a metal stream held by Royal Gold is the acquisition of 35% of the gold and 18.75% of the copper from the Mount Milligan copper-gold mine in British Columbia, Canada. Precious metal streams are typically paid in two components. First, the company is committed to pay approximately $782 million prior to commercial production, as financing for the mine construction. Second, they pay $435 per ounce of gold, and 15% of the spot price per metric tonne of copper delivered to them over the life of the mine. In return for this investment, Royal Gold will be delivered 35% of all gold produced and 18.75% of all copper at Mount Milligan. At December 31, 2015, there were 5.7 million ounces of gold reserves and 2.2 billion pounds of copper reserves at this property.
A royalty is the right to receive a percentage or other denomination of mineral production from a mining operation. Most of Royal Gold’s royalties are based on production generated from a mine. For example, a 2.0% gross value royalty on a mine that produces 100,000 ounces of gold annually, would generate payments having a value of nearly 2,000 ounces of gold per year. At a gold price of $1,200 per ounce, this would result in royalty revenue to the company of nearly $2.4 million per year.
The Company’s portfolio contains several different kinds of royalties or similar interests which are defined as follows:
- Gross Proceeds Royalty (GPR): A royalty in which payments are made on contained ounces rather than recovered ounces.
- Gross Smelter Return (GSR) Royalty: A defined percentage of the gross revenue from a resource extraction operation less, if applicable, certain contract-defined costs paid by or charged to the operator.
- Gross Value (GV) Royalty: A defined percentage of the gross value, revenue or proceeds from a resource extraction operation, without deductions of any kind.
- Milling Royalty (MR): A royalty on ore throughput at a mill.
- Net Profits Interest (NPI) Royalty: A defined percentage of the gross revenue from a resource extraction operation, after recovery of certain contract-defined pre-production costs, and after a deduction of certain contract-defined mining, milling, processing, transportation, administrative, marketing and other costs.
- Net Smelter Return (NSR) Royalty: A defined percentage of the gross revenue from a resource extraction operation, less a proportionate share of incidental transportation, insurance, refining and smelting costs.
- Net Value Royalty (NVR): A defined percentage of the gross revenue from a resource extraction operation, less certain contract-defined costs.
Stream and royalty finance is a cost-of-capital efficient alternative to traditional debt project finance and equity. Returns are based on life of mine cash flows, with no required reserve tail or final maturity date. With returns based on production, Royal Gold shares in the operating risk of the project, thereby eliminating the possibility of financial distress often caused by principal payments, maturity dates and hedging delivery requirements.
While streams and royalties share in a percentage of price and production upside, each stream or royalty is limited to a specific project. This differentiates it from the issuance of equity, which dilutes the upside of a company’s entire portfolio of properties.
Royal Gold can structure transactions on a traditional royalty basis or a combination of upfront and per ounce payments under the streaming model. Royal Gold seeks metal streaming and royalty opportunities on gold and silver deposits as well as polymetallic/base metal ore bodies containing precious metal by-products.
The benefits of stream and royalty finance include: (1) returns calculated over the life of the mine, thereby enhancing internal rates of return to the operator, (2) payments a function of price and production, providing needed financial flexibility in the event of production disruptions or declining commodity prices, (3) no required hedging, front end fees, financial covenants or account structures, (4) straightforward and easy to comprehend legal documentation, and (5) a short execution timetable.
Stream and royalty finance can be used to assist in the funding of exploration and development, mine and mill expansions, mergers and acquisitions, the restructuring of hedge positions or balance sheets, and reclamation obligations.
Comprehensive Project Finance
Royal Gold’s product can participate as one layer in an overall financing that includes debt and equity. With payments calculated on a life of mine basis, a stream or royalty can actually reduce debt requirements and associated required hedging, while also limiting the dilution to existing shareholders of a larger equity issue.
The company also strives to tailor business opportunities to the unique characteristics of counterparties through creative structures. Their team has considerable operating expertise in a variety of commodity markets and in many international locations. Almost all mining operations experience unexpected issues during exploration, development and operations and it is important for mining operators to be able to talk through these issues with an experienced and qualified partner, like Royal Gold.
Holding gold is always a good hedge against inflation but holding shares in a gold company offers the benefits of an inherent value that will reflect the value of gold while throwing off a dividend that produces some income while the overall economy and foreign exchange markets determine the price of gold.
I prefer not to own a gold mining company primarily because gold mining companies cannot control the price of gold and can only control the cost of mining the gold. And there's a myriad of problems with that scenario like bad management and depleting mines.
Royal Gold doesn't own and explore mines like a mining company, but buys precious metals from miners at fixed costs in exchange for up-front funding. That offbeat business model makes Royal Gold an intriguing and compelling investment choice.
For starters, Royal Gold enjoys incredibly low costs for two reasons: It doesn't have to bear any costs related to exploration, operation, or maintenance of mines; and it secures bullion streams from miners at rates substantially below spot rates. Consider this: Royal Gold generated $117.9 million in revenue in its fiscal first quarter ended Sept. 30, 2016, against cost of sales (which is simply the cash it pays to purchase gold and silver from miners) of only $22.7 million. The streamer's quarterly revenue and earnings per share hit record highs, setting the tone for a strong year ahead.
Thanks to its low costs, Royal Gold leverages investors to gold prices with significantly low risks. That, perhaps, is the biggest argument in favor of investing in the company. Unless gold prices fall off the cliff, Royal Gold should still be making enough cash to sustain operations. For investors, that also means stable and growing dividends -- Royal Gold has raised its dividends for 16 straight years.
For these reasons I expect to accumulate shares of this company in the very near future and then let the investment grow naturally through dividend reinvestment and additional puchases at beneficial prices.