In the world of investment, gold has long been a sought-after asset for its ability to preserve value and act as a safe haven during economic uncertainties. While traditional methods of investing in gold involve physical holdings or shares in gold mining companies, a new trend is emerging that offers a unique and potentially lucrative approach: gold royalty stocks.
Understanding Gold Royalty Stocks
Gold royalty stocks are contracts that provide the owner, usually a gold royalty company, the right to a percentage of gold production or revenue in exchange for an upfront payment. These contracts act as a means for gold royalty companies to finance mining operations in need of capital. The appeal of this alternative form of financing lies in its advantages over traditional debt or equity issuance.
Gold royalty companies may also acquire pre-existing royalties to diversify their portfolio of royalty assets. These royalties typically cover the entire life of a mine, giving the gold royalty companies exposure to exploration upside that may extend a mine’s lifespan and increase the amount of gold or revenue they receive from mining companies at no additional cost.
How a Gold Royalty Works
The process of a gold royalty starts with the discovery of gold on a property. From there, the mining company progresses through various stages, including exploration, development, and eventually, production. During the development phase, mine construction requires substantial capital, and gold royalty companies may provide royalty or stream financing to support the project.
Once the mine is in production and begins producing gold, the mining company sells the refined gold and writes a percentage of the revenue or profit to the royalty owner as per the contract terms.
Royalties vs. Streams
Gold royalties come in different forms, with two common types being Net Smelter Returns (NSR) royalties and Net Profits Interest (NPI) royalties. NSR royalties entitle the royalty owner to a percentage of the revenue from the mining company, minus refining costs. On the other hand, NPI royalties provide the royalty owner with a percentage of the mine’s profits.
Gold streams, another variant of gold royalties, involve the mining company selling the stream owner a set percentage of the metal produced. The price per ounce is either a fixed rate, typically lower than the gold spot price, or a percentage of the spot price. The royalty company makes profits by selling the gold at the current market value.
An Attractive Financing Option
Gold royalties offer mining companies an alternative means of financing. Rather than accumulating traditional debt with restrictive covenants or issuing equity that dilutes shareholder value, a royalty contract provides the capital they need without repayment obligations until production begins.
Between 2009 and 2019, royalties, including streams, contributed a significant $25.8 billion to total mine financing. As traditional debt and equity financing methods have declined, gold royalty and streaming companies have flourished, reaching a combined market cap of over $47 billion by the end of 2019.
A Golden Investment
The performance of gold royalty stocks over the past decade has been impressive, outperforming both gold itself and traditional gold mining companies. The total return on investment for the largest gold royalty companies has been 183%, four times higher than that of physical gold. In contrast, the average gold mining company, as measured by the VanEck Gold Miners ETF (GDX), generated a negative return during the same period.
Top Gold Royalty Stocks
Among the top gold royalty stocks to consider investing in are:
Osisko Gold Royalties Ltd
Osisko Gold Royalties Ltd is a reputable company that focuses on acquiring and managing royalties, streams, and other interests related to precious metals and assets. With a diverse portfolio, the company operates not only in Canada but also globally. Its unique offerings include options for offtake, royalty/stream financings, and exclusive rights for future royalty/stream financings. In the last reported quarter, the company showcased a strong financial performance, reporting a Q4 non-GAAP EPS of C$0.19 and a revenue of C$61.9 million, representing a significant year-over-year increase of 22.2%. Notably, 18 hedge funds have shown a bullish outlook on Osisko Gold Royalties Ltd (NYSE: OR), and the largest stakeholder in the company is Eric Sprott’s Sprott Asset Management, holding 3.4 million shares valued at $41.8 million. Osisko Gold Royalties Ltd is an attractive option for investors seeking exposure to the gold royalty sector.
IAMGOLD Corporation is a well-established player in the gold mining industry, actively involved in exploration, development, and operations of gold mining properties across West Africa and North America. Recently, BMO Capital raised its rating for IAMGOLD Corporation from Market Perform to Outperform, while increasing the price target to $3.25 from $2. The company has shown a remarkable financial recovery in recent months by divesting some higher-cost and higher-risk assets, positioning itself for a promising future. Despite some risks associated with the startup at Cote, IAMGOLD Corporation remains a premier choice among gold stocks. 18 hedge funds are optimistic about the company’s prospects, with David Iben’s Kopernik Global Investors leading the pack as the biggest stakeholder with 24 million shares valued at $62 million.
Wheaton Precious Metals Corp.
Wheaton Precious Metals Corp. is a major player in the precious metals market, with a strong presence in North America, Europe, and South America. The company predominantly deals in precious metals, including gold, silver, palladium, and cobalt, making it a key player in the streaming and royalty sector. Notably, Wheaton Precious Metals Corp. has consistently rewarded shareholders, evident from its recent declaration of a quarterly dividend of $0.15 per share. This move reflects the company’s strong performance and commitment to shareholder value. Stifel analyst Ingrid Rico has increased the price target for the company’s shares, maintaining a Buy rating. 28 hedge funds have expressed optimism about Wheaton Precious Metals Corp., with Horizon Asset Management leading the way as the most significant stakeholder, holding 3.4 million shares valued at $134.8 million.
Franco-Nevada Corporation is a renowned specialist in the gold industry, specifically focusing on royalties and streaming. The company operates in Latin America, the United States, and Canada, dealing in precious metals such as gold, silver, and platinum group metals. Additionally, it participates in the selling of crude oil, natural gas, and natural gas liquids. The recent target price increase by Heiko Ihle, an analyst at H.C. Wainwright, reflects the positive market trends and Franco-Nevada Corporation’s strong Q1 results. As a result, the company continues to be an attractive option for investors seeking exposure to the gold industry. 27 hedge funds have shown confidence in Franco-Nevada Corporation, with First Eagle Investment Management being the biggest stakeholder, holding more than 2 million shares valued at $288.6 million.
Royal Gold, Inc.
Royal Gold, Inc. is a prominent player in the precious metal streaming and royalty sector, boasting a diverse portfolio of interests in gold, silver, copper, nickel, zinc, lead, and other metals. With a presence in various countries such as the United States, Canada, Chile, Australia, and Mexico, the company is strategically positioned for growth. Its recent financial performance is commendable, with a Q1 non-GAAP EPS of $0.96, in line with market estimates. Furthermore, the company’s revenue for the period increased by 4.9% year-over-year, surpassing Wall Street consensus by $7.63 million. Analyst Matthew Murphy has increased the price target for Royal Gold, Inc.’s shares and maintained an Equal Weight rating. This company is an attractive option for investors seeking exposure to precious metals. 22 hedge funds have shown interest in Royal Gold, Inc., with First Eagle Investment Management holding the largest stake of 3.5 million shares valued at $404 million.
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Exploring the Prospects for Future Growth
As the popularity of gold royalty stocks rises, investors seek growth prospects in this sector. Several factors contribute to the positive outlook for gold royalty companies. Rising gold prices benefit them, as higher prices mean increased royalty payments and revenue. Gold royalty stocks offer a unique portfolio diversification option, mitigating risks during market volatility. These contracts cover the mine’s entire lifespan, enabling companies to benefit from exploration success without extra costs. Gold royalty agreements provide a favorable financing option for mining companies, accessing capital without burdensome debt. Additionally, gold royalty companies offer attractive yields and dividends to shareholders, making them a valuable investment choice in the evolving gold market. As the gold market continues to evolve, gold royalty stocks are likely to remain a valuable component of investment portfolios, presenting an alternative opportunity to capitalize on the enduring value of gold while diversifying holdings and potentially earning attractive returns.
Gold royalty stocks represent a compelling investment opportunity, offering investors a unique way to tap into the gold market’s potential without taking on the operational risks associated with mining companies. As these stocks continue to gain popularity and demonstrate strong performance, they can serve as a valuable addition to diversified investment portfolios. However, as with any investment, thorough research and due diligence are essential to making informed decisions and maximizing the potential rewards of gold royalty stocks.
Q : What are gold royalty stocks?
A : Gold royalty stocks are contracts that entitle the holder to a share of gold production or revenue in exchange for an upfront payment.
Q : How do gold royalty companies earn money?
A : Gold royalty companies make money by receiving royalties or streams from mining companies for the gold extracted from their mines.
Q : What are the benefits of investing in gold royalty stocks?
A : Investing in gold royalty stocks provides exposure to the gold market, steady income from royalty payments, and reduced operational risks compared to direct mining investments.