Royal Gold: A Shiny Future Earning Royalties

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."

Talk about a chance to own the goose (or a flock of geese) that lays the golden eggs! Let's look closer at how a metal stream operation works, and where those "golden eggs" derive.

How a Metal Stream Operates

According to the company, one example of a metal stream is the acquisition of 52.25% of the gold from the Mt. Milligan copper-gold project in British Columbia. "Precious metal streams are typically paid in two components. We committed to pay approximately $782 million prior to commercial production, as financing for the mine construction, and we also committed to pay $435 per ounce of gold delivered to us over the life of the mine," the company said.

In return, "Royal Gold will be delivered 52.25% of all gold produced at Mt. Milligan. There are currently six million ounces of gold reserves at this property. Annual gold production is estimated to average 262,000 ounces over the first six years of production with an estimated mine life of 22 years."

No wonder Steve Sjuggerud, the editor of True Wealth, is so excited about the prospects of the Royal Gold investment theme. I've interviewed Sjuggerud in the past and he told me he loves investments that are "cheap, hated and in an uptrend." Right now that would include any companies that have anything to do with the gold and silver metal streaming and royalties business.

Recently, Steve spoke with John Doody of the Gold Stock Analyst newsletter, who has a tremendous amount of experience with publicly traded precious metals miners and royalty companies. John feels the same way I do, that just about everyone who wanted to sell these companies to capture the losses has done so by now.

So Steve asked him for a safer way to play the nascent rebound in the precious metals sector using a company that is very unlikely to go out of business.  John's response: "Royal Gold has over $1 billion in buying power right now, between $700 million in cash and a $350 million credit line. With what has happened to gold and gold stocks, the company is in an ideal position to acquire royalty 'streams' for dirt-cheap prices."

That comment was spoken when RGLD was closer to $50 a share. Since then the stock has risen more than 10% to over $56.

Both Steve and John happen to share my opinion that RGLD will at some point in the next 12 to 24 months rally to $100 per share based on Royal Gold's average valuation since 2008. However, in the early stages of a precious metals bull market, Royal Gold may trade much higher than its average valuation.

Royal Gold virtually can't go out of business because it has guaranteed income from its royalties and metal streams, which is its only business operation.

As 2014 dawned the Denver company said its fiscal second-quarter 2014 results will be released before the market opens Jan. 30, followed by a conference call that day at noon Eastern Time.

RGLD looks relatively cheap, and from my research it appears to be selling just a little above its price-to-book value. When you compare it to its competition, Franco-Nevada (FNV), which I estimate is stil priced with a price-to-tangible book value that's close to 40% higher than RGLD, it really looks like a bargain.

Both companies pay a dividend with a yield between 1.5% and 1.6%, and both like to reward shareholders with dividend increases that are likely to be sustainable.

The following chart of RGLD reveals that based on its most likely current price-to-tangible book value (which will learn more about when the company reports its latest earnings), today it's even cheaper than the last time gold stocks crashed in late 2008. Opportunities like this don't come along every day.

RGLD Price to Tangible Book Value ChartRGLD Price to Tangible Book Value data by YCharts


It's plain to see that as the stock's price-to-tangible book value goes, so goes the stock price. On Tuesday the stock price moved above $56 a share. Perhaps the best investment strategy is to nibble a little now and if RGLD happens to revisit the $51 level between now and Jan. 30 when it releases its results, it will be time to back up the truck.

For comparison purposes here's the same kind of four-year chart for Franco-Nevada. It just reinforces my conclusion that for the time being RGLD is a much better value with significantly more upside potential.

FNV Price to Tangible Book Value Chart
FNV Price to Tangible Book Value
data by YCharts

Once again we see the historical reality that the stock price of the royalty, metal streaming companies like FNV and RGLD follows the stock's price-to-tangible book value.

Remember, do your own due diligence before investing, use a position sizing discipline, and with RGLD use a trailing stop loss percentage that gives you a good chance of not being stopped out too early. Historically a 30% trailing stop loss has worked well in that regard.

At the time of publication the author had positions in RGLD and FNV mentioned in this article.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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Royal Gold seeks to expand its business through four key 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; and
  4. Provide acquisition finance, in partnership with established operating companies, in return for a royalty or metal stream on the acquired properties.
- See more at: http://www.royalgold.com/business-model/growth-strategy/default.aspx#sthash.uGYinIwA.dpuf
  1. Royal Gold seeks to expand its business through four key 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; and
    4. Provide acquisition finance, in partnership with established operating companies, in return for a royalty or metal stream on the acquired properties.
    - See more at: http://www.royalgold.com/business-model/growth-strategy/default.aspx#sthash.uGYinIwA.dpuf

Marc Courtenay is the founder and owner of Advanced Investor Technologies, LLC, as well as the publisher and editor of www.ChecktheMarkets.com.

Courtenay holds a Master's of Science degree in Psychology from California Polytechnic State University, and is a former senior vice-president of Investments for two major brokerage firms. He's been a fiercely independent investment "investigator" and a consulting contributor to the investment publishing world for over 30 years. In addition to his role as an investment publisher and analyst, he serves as a marketing consultant to the investment media industries.

In his role as a financial writer and editor, he specializes in unique investment strategies, growth with income stocks, overlooked investment themes, tax-advantaged themes, risk management, technologies to capture gains and reduce losses, real estate related opportunities,effective wealth preservation techniques, and the use of ETFs for diversification and asset allocation. He also follows and frequently writes about technology, health sciences, energy and resource companies. Because of his training and background in Clinical Counseling and Psychology, he enjoys writing about investor behavior, the herd mentality, how to turn investment mistakes into investment breakthroughs and the stock market's behavioral trends and patterns.

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