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2 Unstoppable Gold Stocks to Buy in 2022 and Beyond | The Mesh Report

2 Unstoppable Gold Stocks to Buy in 2022 and Beyond

The Gold Enthusiast December 15, 2021 Comments Off on 2 Unstoppable Gold Stocks to Buy in 2022 and Beyond

Gold stocks tend to be pretty volatile, particularly if you delve into the smaller miners. But it doesn’t have to be that way if you step back and consider all of your alternatives in the precious metals space. Royal Gold (NASDAQ:RGLD) and Wheaton Precious Metals (NYSE:WPM) are two gold stocks that do things a bit differently, a fact that makes them worth a close look in 2022 and beyond.

The basic precious metals model

If you want to get gold out of the ground, first you need to find a place with enough gold. Then you have to get approval to build a mine (no easy task given the environmental effects of a mine). You have to finance and construct the mine, and then you have to run it. Although this is an oversimplification of the process, not a single step here is at all simple or cheap. In fact, even after a company has a successful mine, there are still material risks, including variable ore grades, mine accidents, and work stoppages, among many others.

Then there’s the not-so-subtle fact that precious metals are commodities prone to material price swings. Given the high cost of operating a mine, a material price decline can quickly hit a gold miner’s revenues and profit margins. You can’t sidestep all of these issues, but you can minimize the effect they have on the precious metals stock you choose to buy. And the best way to do that is to invest in a streaming and royalty company like Royal Gold or Wheaton Precious Metals.

Streaming and royalty companies give cash up front to miners for the right to buy gold, silver, and other metals in the future at reduced rates. The miners use the cash to invest in their businesses (building mines, for example) or strengthen their balance sheets. Meanwhile, the streamers lock in low prices for years to come.

For example, in June 2021, Royal Gold paid $100 million (with an additional $10 million commitment) for gold produced from the NX Gold Mine in Brazil. It will pay 20% of the gold’s spot price up to certain target production levels and then 40% thereafter. It doesn’t matter what gold is trading hands at, Royal Gold has locked-in wide margins and it bypasses many of the risks inherent to the mining process.

Some particulars to consider

The interesting thing is that this deal is just one of more than 190 investments that Royal Gold has made. Of that total, 44 are producing properties, 16 are in development, and the rest are in the evaluation and exploration stages. Roughly 74% of its revenues come from gold, with the rest split across silver, copper, and other metals. Its mine portfolio is spread across 12 countries.

While seven of its mine investments account for the bulk of its production, the more than 100 other investments offer long-term growth opportunities — and, for smaller-producing assets, an offset if something should go wrong at one of the larger mines.

Indeed, that’s an important point to highlight. Having a diversified portfolio of mine investments helps reduce mining risk, but it doesn’t eliminate it. If a mine stops producing for some reason (an accident or work stoppage, for example), the streaming and royalty revenues stop, too. The difference is that Royal Gold has more mine investments than a pure-play miner is likely to have, so the overall effect won’t be as material.

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