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Commodity Investing

Investing in Gold Royalty Companies

I know, you’ve probably heard it a thousand times by now…

Investing in gold 10 years ago would’ve been one of the greatest decisions you could’ve ever made.

And it’s true.

Since August 2002, gold prices have exploded as much as 418%.

However, momentum has certainly slowed.

Over the last two years, gold prices have climbed 35%. Per year, that’s almost 7% slower than its average growth rate over the last decade. Still not horrible.

But the slowing growth has been tragic for gold mining companies

If you had simply invested in the two largest gold producing companies – Barrick Gold Corp. (NYSE: ABX) and Newmont Mining Corp. (NYSE: NEM) – over the last two years, you’d actually be down by an average of 20%.

There are a litany of likely reasons for the declines in mining companies over the last few years. Among them are higher energy prices, along with the mass exodus by investors from using gold mining companies as a proxy for precious metals. Ever since ETFs exploded on the scene, they’ve become the preferred gold proxy.

It has been a frustrating ride for many gold enthusiasts. But I’m writing you because there is an alternative gold investment that has flat-out blown away the returns of the top gold mining stocks and even the price of gold itself.

I’m talking about gold royalty companies.

More Gold Exposure, Less Risk

No, we’re not talking about royalty in the sense of kings and queens. Rather, these companies earn royalties on mines, sort of like musicians earn on sales of their hit songs.

Gold royalty firms provide financing to gold miners in exchange for payment in the future. You can think of them kind of like a bank, but for mining companies.

And these future payments can come in one of two ways:

  1. The royalty company finances a mining exploration project in exchange for a royalty on any future sales produced from any discovery.
  2. The royalty company helps finance a mine’s construction and receives a royalty payment called a “stream.” Streams commit the company getting the financing to either give away a certain number of ounces of the metal per year to the royalty company or a certain percentage of the ounces produced each year from the mine.

You’ll find royalty streams are more commonly preferred for mining companies. And royalty firms also provide financing for miners involved in a number of commodities including zinc, silver, copper, nickel and platinum.

In short, gold royalty companies are a great way to gain exposure to gold miners and producers without necessarily taking on all the risks that come with them.

That’s because the best-run royalty companies will typically have themselves vested in anywhere from 10 to 50 different mines that are paying them royalties and streams.

If one of their mining investments goes sour, they still have a number of other deals that can offset their downside exposure. Also, because they’re simply collecting “tolls,” their value is much less sensitive to drops in the precious metal’s value.

Even Better Than Gold

So what are some of the biggest gold royalty companies today?

Well, the two largest are Franco Nevada Corp. (NYSE: FNV) (TSX: FNV) and Royal Gold, Inc. (Nasdaq: RGLD) (TSX: RGL).

And you may be surprised at just how well they’ve performed.

Franco Nevada made its initial public offering in December 2007 and shares have increased 234% since then.

But even though Franco has only traded on the NYSE for the last four and a half years, don’t be fooled, it didn’t just come on the mining scene.

It’s actually been in business for over 25 years. And today it holds the crown as the world’s largest gold royalty company.

Meanwhile, Royal Gold is the second-largest gold royalty company in the world today.

Astonishingly, as gold prices have increased as much as 418% in the last 10 years, Royal Gold popped even higher… a whopping 457%.

In addition, the company is involved in a few large properties that it expects will pay off for decades.

Now, would it have been best to get in on the companies years ago before real estate fell apart and the global financial crisis hit?

Of course.

But there’s no point reveling in what might have been. And as long as gold prices head higher, you can expect Franco Nevada and Royal Gold to head that way, too… perhaps even much higher if history is any indication.

Good investing,


P.S. More interested in finding out about silver royalty companies than gold? Check out this article by Investment U Executive Editor Justin Dove. It also covers some of the tax advantages of using royalty mining companies as a proxy for the metals.

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