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Last update : November 2013
What Are Gold Royalty Stocks

And why they make good investments

In most circumstances it is not cheap to produce an ounce of Gold or even mine a tonne of Iron Ore, which is why mining companies are as much about financing as they are digging holes.

One financing option open to a mining firm is to sell what's called a Royalty on future production.

The buyer of the Royalty will help finance production but will then be entitled to a percentage of the mine's production after deducting any costs.

It is quite possible for a Royalty to over or underperform in the future. Overperformance would be because the mine is far more productive than was originally thought, or underperformance for the opposite reasons.

Gold Royalty stocks therefore invest directly in Gold Royalties and have little if anything to do with the day to day production and exploration for the metal.

Why investors like Gold Royalty stocks
  • Secured earnings - If quality royalties are bought the company has earnings security combined with low overheads

  • Leverage - Royalties can offer leverage if the price of Gold increases. An example would be an increase of 0.5% in the royalty share for every $25 increase in the price of Gold. So a royalty might pay 4% when Gold is at $300 but 9% if the price is above $900 and an even higher percentage at $1,000+. Of course the opposite is also true

  • Low costs - theoretically all the company has to do is to manage its present royalties, as well as research future purchases. Most royalty companies therefore have low overheads with a low employee count

  • No derivative risk - Many Gold producers sell part or all of their production forward using futures, options and OTC (Over-The-Counter) derivatives. This can be a sensible strategy when prices are falling but if investors buy gold mining companies because they believe gold will rise the best stocks to own are the ones that do little if any forward hedging. Gold Royalty stocks have little or none of this risk
2 examples of Gold Royalty companies

If you- re interested in gold royalty firms then here are two examples -

  • Tanzanian Royalty Exploration (Canadian ticker - TNX.TO : US ticker - TRE), and
  • Royal Gold (US ticker RGLD)

Tanzanian Royalty Corp

This is run by an old Mining/Gold operator called Jim Sinclair. He comes across via his blog as a touch eccentric but there's no doubting his knowledge, experience and pedigree in both the mining and gold trading market.

Like most businesses involved in gold mining it's speculative but if the metal starts to climb higher than $1,000 this is a good company to invest in.

Tanzanian Royalty Corp (Canadian Ticker TNX.TO)

Weekly chart : Jan 2010 - Aug 2011

Latest chart and price on Google Finance

Royal Gold Inc
  • Only buys royalties, and in my opinion a well run company with excellent free cash flow
  • Its main royalties are in Nevada, California, Argentina and Russia
  • Run by another well known gold operator, Stanley Dempsey, and insiders own over 15% of the company's shares
  • Company website
  • Google Finance page

Royal Gold Inc (US Ticker RGLD)

Weekly chart : Jan 2010 - Aug 2011

Latest chart and price on Google Finance

Summary

In general Gold Royalty stocks should be less volatile and less of a risk than most small to medium sized mining and exploration firms. But they have just as much, if not more, leverage if the price of Gold starts to increase significantly beyond $1,000.

And for these reasons I sold the majority of my mining shares a few years back and am now heavily invested in the above two stocks. Note that in my opinion Tanzanian Royalty is far more speculative than Royal Gold.


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