April 23, 2014

5 Gold Royalty Companies that Reduce the Risk

Gold Royalty Companies

Investing in gold royalty companies is a tremendously attractive way to gain exposure to the junior gold sector. Royalty companies generally receive a Net Smelter Return (NSR) as a percent of revenue generated by gold sales. Thus, they still take part in operational risk but it is reduced because they don’t incur the costs of mining.

Sometimes you will also see “streaming” agreements, whereby the royalty company buys the production with an upfront cost plus a fixed cost per ounce as it is mined.  The primary difference to the investor is that streaming agreements remove the operational risk even more, because the royalty company buys the first production, not the last production, and the purchase price is fixed.

I have invested in a few of these and I will provide a brief overview and analysis of each.

  1. Franco-Nevada Corp. (FNV-T, FNV-N) is the big boy in the space. Although originally formed on the basis of a royalty agreement with Barrick for the Goldstrike mine in Nevada, USA, Franco-Nevada has done a good job diversifying itself over the years. Goldstrike now accounts for only about 20% of revenue (the Palmarejo gold streaming agreement accounts for about 25%). Franco-Nevada pays a dividend of $.72/share, or about 1.5%.
  2. Royal Gold (RGL-T) is the other major player in the space.  They have arguably a larger development pipeline with big royalty agreements on two of the world’s giant deposits under development:  Barrick’s Pascua Lama project under construction and Seabridge Gold’s 42 million ounce KSM deposit.  With an annual dividend of $0.80/share (1.1%) the dividend is slightly lower but the potential upside is higher.
  3. Silver Wheaton (SLW-T) is one of my big winners.  They basically invented the streaming business, which is particularly suited to silver but has now been successfully applied to gold as well.  Silver Wheaton’s overall cash cost per ounce is still $3.90, which used to be a healthy 50% discount to the spot price but has since turned into a ten fold profit on the original silver stream.  Of course, purchase agreements are pricier now but Silver Wheaton is still a big cash cow.
  4. Sandstorm Gold (SSL-T) is not related to Silver Wheaton but Silver Wheaton’s success resulted in its CFO leaving to start Sandstorm.  Like Silver Wheaton, they stick to streaming agreements, with the primary differentiator being gold rather than silver.  They have assembled a fairly strong list of revenue properties with a cash purchase cost of about $400/ounce.
  5. Gold Royalties Corp. (GRO-X) is a relatively new player in the space, with first revenue occurring in February 2013 from their Net Smelter Return royalty on Metanor Resources’ Bachelor Lake mine.  With another size royalty agreements waiting on revenue once production starts, this one could be a good speculative royalty play.

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