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 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.
Today we’re highlighting an approach to precious metals that you may not have considered. This approach falls somewhere between metal and miner on the spectrum of risk for precious metal investing. 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 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 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 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. The unique business model supports miners and produces cashflow, 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.
Franco-Nevada Corp. (FNV) is a gold-focused royalty company with additional interests in silver, platinum, oil, and other resource assets. They have a diversified portfolio of 54 producing assets, 41 advanced assets (which are not yet producing), and 233 exploration stage mining properties. FNV generated around 86% of revenues from the Americas and 14% from the rest of the world and invested $314 million in acquisitions in 2021.
Franco-Nevada (NYSE: FNV) actively manages its portfolio to maintain a diversity of revenue sources; however, most of its stakes are still in gold. In 2021, 91% of revenues were earned from gold, with the other 9% from energy assets. Their revenue is expected to remain greater than 80% precious metals through 2025.
FNV stock has delivered a 13% gain over the past month, but the pros see more runway ahead. The high end of the twelve-month forecast is $185, which would be a 15% increase from the current price. As one of the top players in the stock currently trades at a premium, with a forward P/E ratio of 44. It also comes along with a 0.8% dividend.
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