NEW YORK ( TheStreet) -- When I first heard of Royal Gold ( RGLD) the price of gold was nearing $1,000 an ounce and on its way to over $1,900. Now gold trades for about $1,243.
During the last 30 months this unique company has collected many millions in royalties and a small fortune in total cash.
The last 15 months have been challenging for RGLD, but it has continued to collect royalty payments and work to expand its business while the gold mining industry experienced a major correction. From its Web site we learned Royal Gold seeks to expand its business through four initiatives:
1. Acquire existing royalties or metal streams
2. Provide capital for the exploration, development and construction of precious metals mines in exchange for royalties
3. Monetize precious metals by-product streams from base metals operations in development or operation
4. Provide acquisition finance, in partnership with established operating companies, in return for a royalty or metal stream on the acquired properties
Many investors have heard of "royalties" but what is a metal stream? A metal stream is an agreement that provides, in exchange for an upfront payment, the right to purchase all or a portion of the precious metals produced from a base metal mine, at a price determined for the life of the transaction by the agreement.
The price of the precious metals transaction is locked in for the lifetime of the agreement that Royal Gold makes with the gold producer that owns the mine. This means if the price of gold is higher than the negotiated price, RGLD can purchase all or part of it at the lower price. Then the company receives the difference in cash profits when it sells the gold at the currently higher price.
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. As the company's Web site explains,"The establishment 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."