Investing in precious metals often seems to be reduced to two options. You can either buy physical gold/silver – the more straightforward, less risky option but often with the lowest returns, or invest in specific mining companies – which requires significant research and generally carries more risk.
There is another option that you might not have considered — royalty companies. On the spectrum of risk for precious metal investing, royalty companies fall 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 significantly outperformed 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 47% and the GDX’s return of 58%.
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 are already set, royalty companies can still make money even when gold prices are falling. Plus, they don’t participate in the mines’ operations, 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 can 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 than mining companies.
Royalty and streaming companies’ unique business model supports miners and produces cash flow, offering stability and returns for investors even during downturns in gold price. This is possible thanks to high-profit margins and exposure to a 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.
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 generated around 86% of revenues from the Americas and 14% from the rest of the world and invested $314 million in acquisitions in 2021. The company finished 2021 with zero debt and $1.6 billion in available capital, thanks to its low-risk business model combined with rising commodity prices.
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 2021, 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.
FNV stock has lost 10% over the past month, but the pros see brighter skies ahead. A median price target of $180 represents a 39% upside. The stock trades at a premium, with a forward P/E ratio of 37, and comes along with a 0.95% dividend.
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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 acquired 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 fewer 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 7, compared to peers like Metalla Royalty (NYSE: MTA), which currently trades at 101 times 2022 estimated profit to revenue. As of Wednesday’s close, ELE traded at just $1.19 per share.
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Royalty Gold (NYSE: RGLD) is one of the world’s leading precious metals royalty companies. 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 margins with a low-cost structure. As a result, RGLD notched record financial performance for the fiscal year 2021.
The company reported record revenue in 2021 of $677 million, up 37% year over year, and earnings of $4 per share which is a 67% increase from 2020 numbers. Royal Gold reported an operating cash flow of $407.2 million, closing the year debt-free, with net cash of $222 million and available liquidity of $1.2 billion.
“Not only did we produce record financial results, but we also achieved several significant strategic goals in fiscal 2021,” commented Bill Heissenbuttel, President and CEO of Royal Gold.
Prospective investors with a long-term outlook should appreciate RGLD’s position as a sector leader when it comes to raising its dividend. In November 2021, the firm earned its inclusion as the first and only precious metals company in the S&P High Yield Dividend Aristocrats Index. Currently, investors enjoy a 1.33% dividend yield.
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