's business model allows the company to profit off of a rising
without battling the risks gold miners face.
Royal Gold is a royalty company that makes the majority of its money by buying a percentage of production sales from a mine in exchange for an upfront payment.
Royal Gold has also expanded its business model to include streaming production where it is guaranteed a percentage of gold production for the life of the mine at a fixed rate in exchange for this upfront payment. That rate can be as low as $400 an ounce, which provides big upside as long as the gold price stays high.
Royal Gold also benefits because its costs are extraordinarily low. The company only employs 20 people and doesn't have to do any of the actual mining, sidestepping those risks and operating expenses.
One of the risks for the company is if the mine it helps finance doesn't work. If there is a delay in mining, there will be a delay in profits. In the United States, however, where Royal Gold has most of its properties, if the project goes belly up, Royal Gold still owns a part of the land.
The company currently has 187 royalty projects all over the world with 34 of them already producing and 84% of its 2010 revenues coming from precious metals. In its last fiscal quarter, Royal Gold's revenue jumped 83% and it earned 21 cents a share.
The only current problem is its upside for investors. Shares are up only 3.8% year-to-date versus the gold price, which is up 19.8%, and
which has rallied 18.8%. I sat down with CEO Tony Jensen at the Denver Gold Forum to find out what an investor can really get from Royal Gold other than safety.
TheStreet: Since Royal Gold is a royalty company and not a miner, do you really provide that leverage that investors are used to with gold miners
: I think the leverage in Royal Gold comes through its growth profile and also the option value through the exploration and valuation portfolio. We wouldn't have the same kind of leverage that a high cost producer might have. A high cost producer may be over $1,000 an ounce and if the gold price moved up by $100 that would be a very substantial move in the profitability of that company. We aren't that type of investment. We're a much more secure type of investment.
So I understand that you don't provide that kind of leverage to the miners but you aren't even providing leverage to the gold price, so why does Royal Gold make a good investment at all
Well if you look back during this gold bull run over the last decade you can see ... how Royal Gold has performed during that period of time. Compounded annual growth rates
are over 25% in just about every matrix that you could imagine whether it be earnings, revenue or free cash flow. I think if you look at a daily type movement you might not see that leverage each and every day but over a period of time you can see that we've outperformed gold.
Looking back to June 2001 when the gold price first started to move .... gold has moved 5 times. When you look at our revenue
it has moved at about 22 times and our EBITDA
moved about 37 times. I think we offered a pretty compelling case during that time.
So how do you pick the company and the projects that you want to lend money to
It really starts with people. When we see a good suite of operators on a very good asset, it's really something that we want to get associated with. Our real investment case is one where we want to look at a good host country, quality operator, long lived asset, near term production, staying power. We want to be able to be associated with those and of course it has to be of a substantial size for Royal Gold as well to make it worth our investing our limited resources. We very much like the royalty finance type of deals. We've done a number of them already and we look to grow our business in that fashion in the future.
So in terms of projects, do you just pick ones where they are close to production or do you dabble in more exploration and development type projects as well to get exposure to more risky assets
We will dabble in some of the exploration assets. We call it strategic financing so we'll have a strategic alliance with a particular operator or explorer. Instead of those folks spending a lot of time ... trying to raise capital they can come to us and we'll put $1 million or $2 million into their exploration target, if we like the people and we like the project. It's a long term exposure for us in exchange for that we ask for a royalty interest. We don't have to get paid back we'll take that risk but we want a royalty interest on their property in the future.
What's the ratio
Very very small on the exploration strategic alliances because that is a lot further out. Those deals would be in the $1 million-$5 million range and there will maybe be 1 or 2 of those a year but when it comes to royalty financing those deals are hundreds of millions of dollars and we like to see those come every year or two as well.
When it comes to the large major mining companies they generally don't need the royalty financing as much as the mid-tiers do. The mid-tiers who are trying to build a project that might be half a billion dollars or a billion dollars need a mix of capital. And when you look at some component of equity, some component of debt, some component of royalty financing that makes for a very nice suite of capital for those kinds of companies.
Having said that we have done a very nice royalty down on Andacollo in Chile with
, a very first class top tier mining company. They found reason to seek royalty financing and capital in that fashion and then you saw Barrick do a similar type transaction with
.... So I think this royalty financing is gaining quite a bit of credibility in the market place and all sectors are starting to look at that as a reasonable source of capital.
We're always looking for the ways where we can add value. If it's just a matter of cost to capital and competing on that front .... we like to look at a strategic way that we can
add value rather than some other entity.
For example, we were able to do a deal with Barrick Gold a few years ago and buy in their entire portfolio by rationalizing one of the common royalties we shared together. We reduced our royalty rate on there, there was compensation in doing that and that brought extra value in our bid versus the competition's bid. So we are always looking for things that we can do that the competition cannot do.
Going forward how are you going to add value and grow
We're going to continue very much what we've done in the past. You'll see us doing smaller transactions, acquiring existing royalties. Those will probably be in the tens of millions of dollars type of ranges especially
in areas where we already have royalty interest. If we can add on to those, that's very good business for us. Then you'll see us very active in the royalty financing area.
In terms of the countries you like to operate in, can you give me your favorite and maybe your least favorite
Well 97% of our
reserves are in North America and Chile so we're very comfortable in those areas, great geopolitical stability today, but we have interest in West Africa. There are some countries in West Africa that we are quite comfortable with. Australia is a very large area for us as well .... We'd have to learn about China and Russia before we moved into those markets. Generally what we like to do is see if we can get political risk insurance in a country. Not that we necessarily get the political risk but if we can 't get the political risk insurance it tells us a lot about doing business there.
Any country that you avoid like South Africa
No, I wouldn't cross any country off the list. There are some areas that we're very hesitant to
get into it. We'd have to learn a whole lot more about South Africa before we made an investment of any material size.
Ok, so macro view, how high will gold go in the long term
You know when I get asked the question about gold price I really think about what's your view point on the U.S. dollar and fiat currencies. I just don't see a strong recovery in the U.S. dollar for some time to come now. It may perform quite nicely against the euro, against the yen, or the yuan over time
but I just think that gold is a new paradigm now where you're seeing it act as an independent currency. So for the macro economic outlook that's here today I think we are in a very good environment.
Oh I think that's very doable.
I'm not in that ballpark.
What does $1,300 gold mean to Royal Gold
It's a very strong portfolio .... Every dollar that comes into the company really drives right to the bottom line because our costs are fixed with just those 20 people
on staff that I mentioned earlier ... It's a very lucrative business for us and very high margin business at $1,300 an ounce.
What are the trends you are noticing coming out of the Denver Gold Forum
I think the number one trend is an underlying view point that our industry is contracting from a production standpoint and exploration assets are harder to come by and quality things that are coming on line as replacement are troublesome. I think it's harder for the larger companies to continue to grow their portfolio let alone replace it so you see some interesting stress dynamics in the business that play to a stronger gold price as well into the future.
Edited for length and clarity.
Written by Alix Steel in
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