Gold spot price has been on the rise since dropping below $1650 per ounce in late October, its lowest level since March 2020. As concerns of a recession in 2023 escalate, market participants are eyeing gold and other precious metals investments, which often seem 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. But there is another option that often goes overlooked– royalty companies.
On the spectrum of risk for precious metal investing, royalty companies fall somewhere between metal and miner. But when it comes to returns, gold royalty companies have been outperforming for quite some time. Today we’ll delve into the wonderful world of precious metals royalty companies and take a closer look at an exceptional ground-floor opportunity for anyone considering an investment in the royalties space.
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Over the past seven years, royalty and streaming companies have significantly outperformed in both bull and bear markets. An index of five central precious metals royalty and streaming companies beat gold and the GDX over the past seven years with a return of 128% versus gold’s return of 47% and the GDX’s return of 51%.
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 operations of the mines themselves, 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 compared to mining companies.
Royalty and streaming companies’ unique business model supports miners and produces cash flow, offering stability and returns for investors even during downturns of gold prices. This is possible thanks to high-profit margins and exposure to a diversified investment portfolio with built-in upside.
Canada-based Elemental Royalties (CVE: ELE) is an exceptional ground-floor opportunity in the royalties space with operations in the U.S., Australia, Africa, and South America. The emerging royalty company has acquired 12 royalties since 2017, including three gold royalties acquired in 2022 to the tune of $47.5M.
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 trailing twelve-month price-to-revenue ratio of just 8, compared to peers like Metalla Royalty (NYSE: MTA), which currently trades at 89 times its revenue. As of Wednesday’s close, ELE traded at just CAD 1.27 per share.