3 reasons to love this unique gold stock
Some investors looking for portfolio exposure to precious metals choose to buy physical gold. Others prefer to invest in gold miners. But there’s another option that’s often overlooked: streaming and royalty companies like Royal Gold (NASDAQ: RGLD). Streamers occupy a unique niche in the mining industry and their business model allows their shareholders to avoid many of the risks inherent in the other two options mentioned above.
Right now, the Royal Gold share price appears to be lagging behind its major peers, which could make it an attractive investment choice today. Here are three reasons why you might want to jump on board.
Royal Gold fell to the back of the pack
Companies like Royal Gold provide up-front cash to miners which they use to cover construction costs or reduce debt. In return, streamers get the right to buy precious metals at reduced rates in the future. It’s kind of a win-win. Miners have access to the cash they need without having to increase their balance sheets or sell stocks, and streamers lock in low prices for metals they can resell later. This helps streamers maintain strong margins in both good and bad markets, while miners’ margins can fluctuate quite significantly.
A direct investment in gold, on the other hand, has no growth potential other than as the price of the metal moves, while miners and streamers can actually grow their businesses over time. There is a “give and take” to all three options, but streamers like Royal Gold offer a good balance between risk and reward.
What’s interesting right now, however, is that Royal Gold’s stock is particularly lagging behind its major peers, Franco-Nevada and Wheaton Precious Metals. Basically, shares of Royal Gold have moved sideways since the start of 2020 while its peers have risen by over 40% each. But there are some reasons to believe that Royal Gold could close this gap.
1. A new mine is gaining momentum
One of the ways streamers thrive is by investing in new mines. However, these investments are actually dead money until the mines are actually operational, a process that can take years (assuming nothing goes wrong). Royal Gold has helped finance the Khoemacau project in Botswana, a copper and silver mine that was, as of March 31, 92% complete. The mine has since opened and initial production is expected to take place in July. It will continue to accelerate as the year progresses and, as it reaches full production, it should go from being a drain of cash to being a source of cash for Royal Gold.
According to Royal Gold, it “owns the right to purchase 84% of the silver payable at Khoemacau until the delivery of approximately 33.6 million ounces of silver, and 42% thereafter.” The cost of Royal Gold is set at 20% of the cash price of silver. With silver prices at historically high levels today, investors should be watching the progress of this project very closely.
2. It will compensate for a temporary failure
Royal Gold also has an investment in Barrick Gold’s Pueblo Viejo mine, where an expansion project is underway. A problem with mine operations resulted in a 37% year-over-year drop in silver flow deliveries in the first quarter – and less money delivered means less revenue for Royal Gold.
However, Royal Gold’s deal with Barrick requires the miner to make up any shortfall. So, once the issues are resolved, Royal Gold will likely see an increase in its money-taking from Pueblo Viejo for some time as Barrick strives to stick to its end of the streaming market. Therefore, it will not only be a return to normal, but a short-term increase in the flow of money from the mine.
3. It has firepower out of the box
The top two reasons to love Royal Gold right now are potential short-term catalysts that could help the company close its valuation gap with its peers. The third is a bit more uncertain, but still positive: Royal Gold has over $ 1.2 billion in liquidity. That’s a good amount of negotiating power that he could put to use in a new mining project or to buy an active streaming deal.
In fact, after its last fiscal quarter ended, Royal Gold paid off its credit facility, leaving it debt free. To be fair, other streamers have high liquidity as well, so that’s not exactly a major point of difference. However, this opens the door to a potential growth catalyst that would not be there if liquidity were limited. And if Royal Gold hits a good deal, perhaps beating its peers, investors are likely to rethink their stance on the stock.
Overall, it looks like Royal Gold will see better days ahead as its investment in the Khoemacau project begins to pay off and silver production from the Pueblo Viejo mine gets back on track (and Barrick Gold compensates for its previous deficits). On top of that, he has sufficient trading capacity to generate long term returns. Add it up, and there’s good reason to think Royal Gold’s stock might start to close its gap with Franco-Nevada and Wheaton. If you are looking for investments in precious metals today, Royal Gold is worth a deep dive.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.