This morning, stocks ticked lower amid growing geopolitical concerns and speculation about upcoming Fed rate hikes. Over the weekend, tensions between Ukraine and Russia escalated, causing the White House to warn that war in Ukraine could begin “any day now.” As a result, investors are seeking shelter among traditional haven stocks.
Anyone looking for safety amid the looming concerns around rates, inflation, and geopolitics, might be considering precious metals- an investment class typically approached from two access points. You can either buy physical gold/silver – the simpler, less risky option but often with the lowest returns, or invest in specific mining companies – which requires significant research and generally carries more risk.
Today we’re highlighting an approach to precious metals that you may not have considered. On the spectrum of risk for precious metal investing, this approach falls somewhere between metal and miner. But when it comes to returns, companies in this category have been outperforming for quite some time.
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Over the past seven years, precious metals royalty and streaming companies have significantly outperformed in both bull and bear markets. An index of five central precious metals royalty and streaming companies vastly outperformed gold and the GDX over the past seven with a return of 135% versus gold’s return of 49% and the GDX’s return of 60%.
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 profit share after the gold is sold.
Since the prices for mining output are already set, royalty companies can still make money even when the price of gold is 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 have the ability to 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. The 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) has operations in the U.S., Australia, Africa, and South America. The emerging royalty company has acquired nine royalties since 2017, including four gold royalties acquired in 2020 to the tune of $67.5M.
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 more minor limitations to the company’s performance. It’s one of the most attractively priced precious metals royalty companies available with a profit to revenue ratio of just 10.5, compared to peers like Metalla Royalty (NYSE: MTA), which currently trades at 127 times 2021 estimated profit to revenue. Before the opening bell, ELE traded at just $1.60 per share.
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