How to Profit From Precious Metal Royalties

Royalty Companies provide a more stable (and often more profitable) precious metals investment, here are three to consider.

Investing in precious metals often seems to be reduced to two options.  You can either buy physical gold/silver – the simpler, less risky option but often with the lowest returns, or invest in specific mining companies – which requires significant research and generally carries more risk.

But there is another option that you might not have considered — royalty companies.  On the spectrum of risk for precious metal investing, royalty companies fall somewhere between metal and miner.  But when it comes to returns, gold royalty companies have been outperforming for quite some time.

Over the past seven years royalty and streaming companies have outperformed greatly in both bull and bear markets.  An index of five major precious metals royalty and streaming companies greatly outperformed gold and the GDX over the past seven with a return of 135% versus gold’s return of 49% and the GDX’s return of 60%.  

So what is a royalty company?  A royalty company provides funding to the mining company for the tremendously expensive task of building a mine.  Once the mine is producing, the royalty company receives a percentage of that production at a predetermined price or a share of the profit after the gold is sold.  

Since the prices for mining output is already set, royalty companies can still make money even when the price of gold is falling.  Plus they don’t participate in the operations of the mines themselves so royalty companies don’t have to deal with the burden of operating costs and therefore take on much lower levels of debt than producers.

Royalty companies also have the ability to pick and choose their projects and typically hold a diversified portfolio which minimizes concentration risk.  If things take a turn for the worse with one project, the company usually has several more to fall back on.  Plus, dividends of royalty companies are much more consistent and less affected by precious metal price movements compared to mining companies.  

Royalty and streaming companies’ unique business model supports miners and produces cashflow, offering stability and returns for investors even during downturns of gold price.  This is possible thanks to high profit margins and exposure to diversified investment portfolio with built in upside.

In this article we’ll explore a variety of the precious metal royalty investment opportunities that are currently available.  

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Franco-Nevada (NYSE:FNV) actively manages its portfolio to maintain a diversity of revenue sources, however the majority of its stakes are still in gold.  In 2020, 91% of revenues were earned from gold with the other 9% coming from energy assets.  Their revenue is expected to remain greater than 80% precious metals through 2025.  

Franco-Nevada Corp. (FNV) is a gold-focused royalty company with additional interests in silver, platinum, oil and other resource assets.  They have a diversified portfolio of 54 producing assets, 41 advanced assets (which are not yet producing) and 233 exploration stage mining properties.  FNV generates around 86% of revenues from the Americas and 14% from the rest of the world and invested $314 million in acquisitions in 2020.

FNV stock has delivered a 12% gain over the past three months, but the pros see more runway ahead.  A median 12-month price forecast of $156 represents an 8% increase from its current price.  The stock trades at a premium, with a trailing twelve month P/E ratio of 48.7.

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Royalty Gold (NYSE:RGLD) is one of the leading precious metals royalty companies in the world.  The Denver based company holds around 200 producing, development, evaluation and exploration stage properties in some of the world’s most prolific mining regions in North America, South America and Africa.  

The company’s proven business model generates strong cash flow and high margin with a low cost structure.  For fiscal 2020 the company reported operating cash flow of $340.8 million as well as $498.8 million in revenue and earnings per share of $3.04.

Royal Gold’s shares have gained 7.6% so far this year.  The median consensus price target of $140.00 represents a 22% increase over the next twelve months.    

Canada based Elemental Royalties (CVE:ELE) has operations in the U.S., Australia, Africa and South America.  The emerging royalty company has acquired nine royalties since 2017, including four gold royalties acquitted in 2020 to the tune of $67.5M.

An investment in Elemental Royalties is an opportunity to invest in high quality royalties with exciting growth prospects.  All of ELE’s royalties are uncapped and no buyback options exist, which means that there are less limitations to the company’s performance. It’s one of the most attractively priced precious metals royalty companies available with a profit to revenue ratio of just 10.5, compared to peers like Metalla Royalty (NYSE:MTA) which currently trades at 127 times 2021 estimated profit to revenue.  Currently the stock trades at just $1.32 per share. 

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