Some investors looking for portfolio exposure to precious metals choose to buy physical gold. Others prefer to invest in gold miners. But there’s another option that is often overlooked: streaming and royalty companies like Royal Gold (NASDAQ:RGLD). Streamers fill a unique niche in the mining industry, and their business model allows their shareholders to avoid many of the risks inherent to the other two options mentioned above.
Right now, Royal Gold’s share price appears to be lagging its main peers, which could make it an interesting investment choice today. Here are three reasons you might want to jump aboard.
Royal Gold has fallen to the back of the pack
Companies like Royal Gold provide cash up front to miners that they use to cover construction costs or reduce their debt. In exchange, the streamers get rights to buy precious metals at reduced rates in the future. It’s something of a win-win. Miners get access to the cash they need without having to lever up their balance sheets or sell shares, and streamers lock in low prices for metals they can resell later. This helps streamers maintain strong margins in both good markets and bad, whereas miners’ margins can fluctuate quite dramatically.
A direct gold investment, by contrast, has no growth potential other than when the metal’s price moves, while miners and streamers can actually expand their businesses over time. There are “gives and takes” across all three options, but streamers like Royal Gold offer a good balance of risk and reward.
What’s interesting right now, however, is that Royal Gold’s stock has lagged notably behind its main peers, Franco-Nevada and Wheaton Precious Metals. Basically, Royal Gold’s shares have gone sideways since the start of 2020 while its peers are up more than 40% each. But there are some reasons to think that Royal Gold could close that gap.
1. A new mine is ramping up
One of the ways that streamers grow is by investing in new mines. However, those investments are effectively dead money until the mines are actually up and running, a process that can take years (assuming that nothing goes wrong). Royal Gold has helped to fund the Khoemacau Project in Botswana, a copper and silver mine that was, as of March 31, 92% complete. The mine has since opened, with initial production set to take place in July. It will continue to ramp up as the year progresses and, as it reaches full production, it should turn from a cash drain into a cash gusher for Royal Gold.
According to Royal Gold, it “holds the right to purchase 84% of the payable silver from Khoemacau until the delivery of approximately 33.6 million ounces of silver, and 42% thereafter.” Royal Gold’s cost is set at 20% of the silver spot price. With silver prices at historically high levels today, investors should be watching this project’s progress very closely.