Investing in precious metals often seems 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.
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 vastly outperformed 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%.
In this article, we’ll explain how precious metals royalty investments work and discuss some of the most desirable tickers in the group.
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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 investors stability and returns even during gold price downturns. This is possible thanks to high-profit margins and exposure to a diversified investment portfolio with built-in upside. Without further ado, here are a few of the best precious metal royalty investment opportunities currently available.
Franco-Nevada Corp. (NYSE: FNV) is a gold-focused royalty company with additional interests in silver, platinum, oil, and other resource assets. They have a diversified portfolio of 112 producing assets, 42 advanced assets (not yet producing), and 250 exploration-stage mining properties. FNV generates around 91% of revenues from the Americas and 9% from the rest of the world and has invested $314 million in acquisitions in 2022.
With a global recession seemingly on the horizon, it’s a comfort to shareholders that FNV has zero debt, $2 billion in available capital, and is generating operating cash flow at a rate of $1 billion per year. Thanks to its low-risk/high-margin business model, it’s also largely immune to cost inflation.
Franco-Nevada actively manages its portfolio to maintain a diversity of revenue sources. However, the majority of its stakes are still in gold. In Q3, 77% of revenues were earned from precious metals, with the other 23% mostly coming from energy assets. More than 75% of revenue is expected to come from precious metals through 2025.
FNV stock has gained 17% over the past month, and the pros think this is just the beginning. A median price target of $161 represents a 12% upside from the current price. The stock trades at a premium, with a forward P/E ratio of 38, and comes along with a 0.89% annual dividend.
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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. ELE’s royalties are uncapped, and no buyback options exist, so 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 1.25 per share.
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Royalty Gold (NYSE: RGLD) is one of the world’s leading precious metals royalty companies. The Denver-based company holds 186 properties on five continents, including interests in 41 producing mines and 20 development-stage projects in some of the world’s most prolific mining regions in North America, South America, and Africa.
The company’s proven business model generates strong cash flow and high margins with a low-cost structure. As a result, RGLD’s solid balance sheet and access to liquidity provide the cash to finance these acquisitions without equity dilution in 2022. Last year, Royal Gold reported an operating cash flow of $407.2 million, closing the year debt free, with net cash of $222 million and available liquidity of $1.2 billion.
Prospective investors with a long-term outlook should appreciate RGLD’s position as a sector leader when it comes to raising its dividend. In November 2021, the firm earned its inclusion as the first and only precious metals company in the S&P High Yield Dividend Aristocrats Index after 25 consecutive years of raising its dividend. Currently, investors enjoy a 1.35% annual yield.