A look at gold royalty companies

Gold royalty companies provide upfront capital to developing gold mining producers to help with the expenditures of bringing the mine into production. In exchange for providing this upfront capital they receive a royalty on future production. Since building a mine is a very capital expensive expenditure that can often take several years this a win/win deal for both partners.

In exchange for waiting royalty companies receive an excellent return on investment especially if the commodity price increases. A tremendous advantage for royalty companies  is that royalty deals are structured on a % of sales (production). This is important because as costs go up it does not affect the royalty company. Some gold royalty companies use what is known as a metal stream. This is when for a smaller upfront payment the company is required to pay for the metal produced over the life of the mine (at a fixed price).

 Two risks of investing in a gold royalty company are:

1) Production risk – This occurs when a partner does not meet production targets. This will for the most part be temporary as the partner figures out whatever issues it may be having.

2) Commodity price risk –  This occurs if the commodity decreases in price. This is not a huge worry since most royalties are bought at levels far below the current gold price.

The advantage of investing in gold royalty companies are:

1) Diversification – The big royalty companies RGLD and FNV have deals that are geographically diversified all around the world. Each company they have a royalty with is a small % percentage of the overall portfolio. If one or more company struggles it is not a huge impact on the overall portfolio.

2) Low overhead costs – Gold royalty companies only have to deal with administrative costs and can forget worrying about the actual expenditures of being a producer. With inflation increasing significantly over the last several years for gold companies this is a key advantage. The cash cost of production is becoming higher and higher and this is one of the reasons you see a lack of movement in gold companies even with the increasing gold price.

list of gold mining royalty companies:

Company Symbol Share Price Shares outstanding Market Cap Dividend
Royal Gold RGLD $64.81 58,815,000 $3,805,331,000 .15 per quarter
Franco Nevada FNV $42.11 143,900,000 $6,559,629,000 .04 per month
Sandstorm Gold SSL $1.90 346,758,871    $665,777,000 n/a

* Chart as of close on March 28,2012

Franco Nevada (FNV) – Is the largest gold royalty company with a market cap of $6.5 billion.  They are led by chairman Pierre Lassonde who is considered by many to be a living legend in the mining industry. Franco-Nevada is the leading gold royalty and stream company in terms of revenue and number of assets. They hold over 200 mineral royalties and streams as well as over 200 oil and gas royalties. Franco-Nevada has a strong balance sheet with a cash position of over $794 million ($5.50 per share) at year end 2011.  A monthly dividend is also a nice bonus of investing in FNV even with it only being 4 cents a share.

Royal Gold (RGLD) (RGL.T) – Royal gold is the 2nd largest gold company with a market cap of $3.8 billion. With  strong management and a quarterly dividend of 15 cent a share Royal Gold is poised for growth. Royal Gold was named on the Forbes 2011 best small companies list coming in at #42.

Sandstorm Gold (SSL) – Sandstorm Gold is the smallest gold royalty company. It is led by Nolan Watson former CFO of Silver Wheaton which is the largest silver royalty company in the world. In 2012 so far Sandstorm is one of the best performing stocks on the TSX Venture going from $1.24 to $1.90 per share. The management team also runs a metals and oil royalty company Sandstorm Metals and Energy.

With a rising gold price keep these gold royalty companies on your watchlist.

James Fraser

Co-author Mining Stocks Investing Guide