A Safer Way to Invest in Gold Miners: Royalty Streamers

Royalty streamers are specialized firms that help finance mining operations. This structure allows investors to participate in the metals and mining sector without inherent company-specific risks of individual mining operations. Here, four leading metals experts and contributors to MoneyShow.com offer their top ideas among gold royalty streamers. Mike Larson, Safe Money Report Rising volatility, rising credit risk, and rising recession risk all fuel demand for chaos insurance investments like gold. Given how long gold consolidated in a sideways pattern, and the clear technical breakout in June, we should be in for one heck of a move. An intermediate-term target of around $1,700 per ounce looks very reasonable to me. And ultimately, gold could top $2,000 if the right monetary, geopolitical and economic forces come together. I recommend you scoop up shares of one of my favorites: Sandstorm Gold Ltd. . This Canadian firm operates in the precious metals streaming sub-industry. It provides exploration and production financing to mining companies in exchange for cash flow streams, or royalties, based on the output of those mines. The firm started with just five royalty deals back in 2010. But it has over 185 today, spread across companies that are already producing to those in the development and exploration stages. Many of those properties are in North and South America, though there are others in Africa, Australia, and Turkey. Roughly 80% of its revenue comes from gold and silver royalties, with the remainder coming from diamonds and base metals like copper. The stock was recently up 23% year-to-date. But you won't see a dividend yield. That's because it doesn't currently have a payout. Rather, the board believes the stock has been undervalued and has focused on share buybacks as a result instead (with 7.9 million shares repurchased through June). However, cash flow is forecast to rise substantially over the next few years, even assuming no further increases in metals prices. Throw further gains into the mix, and it's likely that Sandstorm will join its larger, dividend-paying peers. That, in turn, could be yet another catalyst to power the stock higher. Gavin Graham, Internet Wealth Builder Franco-Nevada is a precious metals and energy royalty and streaming company with a large and diversified portfolio of cash flow-producing assets in Canada, the U.S., Australia, Africa, and Latin America. It has been the best-performing precious metals stock over the last decade. For the second quarter (to June 30), the company produced 107,774 gold equivalent ounces (GEO), up 0.4% from the previous year. It also had $27.6 million in oil and gas revenues (up 21.6%) for a total of $170.5 million in revenue. That was up 5.7% year over year. Adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) was $137.9 million ($0.74 per share). Net income was $64 million ($0.34 per share). Almost 84% of the revenue was sourced from precious metals and the remainder from energy. That was in line with the company's target of a maximum of 80% precious metals/20% energy. About 80% of revenue came from the Americas (35.7% Latin America, 21.1% U.S., and 23.3% Canada). Recent developments: The major development was the coming on stream of the massive copper/gold mine, Cobre Panama, just after quarter end. First Quantum, the operator, has reiterated guidance for 140,000-175,000 tonnes of copper to be produced in 2019, which led Franco-Nevada to forecast its 2019 GEOs would be at the top end of its indicated range of 465,000-500,000. Also, after quarter-end, the company paid Range Resources $300 million for a 1% overriding royalty on its 350,000 acres of Marcellus shale in the U.S., which caused it to raise its forecast energy revenues in 2019 from $70-85 million previously to $100-115 million. The Brucejack gold mine operated by Pretium Resources has also now started generating royalties. The company pays a quarterly dividend of $0.25, up 4.2% from $0.24 last quarter, for a yield of 1.08%. Overall, Franco-Nevada remains one of the best-managed and lowest risk ways to play the precious metals bull market. With its portfolio of top-class assets, we rate the stock a buy. Adrian Day, Global Analyst We do not expect any of the major gold royalty companies to be the very top-performing stock in a precious metals portfolio during a bull market. But royalty companies on balance, have the lowest risk of any precious metals sector, second only to bullion itself. Osisko Gold reported a small beat to expectations, partly due to better-than-expected production at Pretium's Brucejack, though ounces were down on a year ago, partly due to the Renard diamond mine, currently in restructuring. But the company is expecting a significant improvement in ounces in the second half of the year as the new Eagle Mine of Victoria comes onstream, with first production expected next month, as well as improvement in production from the Eleonore Mine. The most important development in the last quarter was the deal with Orion, a private equity firm. Osisko bought back from Orion shares in exchange for cash and the transfer of several junior investments. The shares repurchased were returned to treasury, resulting in an 8% reduction in shares outstanding, while there was no reduction in the cash generating assets (but a $2.5 million reduction in dividend payments). Orion is now down to just over 6% ownership. The result at quarter end was liquidity of $450 million, plus an investment portfolio now valued at $282 million, down from $400 million prior to the Orion transaction. Osisko tends to be more involved in the companies on which it holds revenues, whether through its accelerator program -- there were several advances at such companies owned by Osisko Mining, in which Osisko Royalties owns over 16% -- or in helping companies in difficulties. Osisko is taking an active role in the restructuring of the Renard mine. The accelerator-or incubator-program certainly adds an element of risk, in addition to the greater leverage not in a traditional royalty company. That, plus Osisko's size relative to the larger royalty streamers partly account for its lower valuation, but the gap has now become quite extreme. All the royalty stocks have moved up and we are expecting a near-term pullback in the gold sector, so you should wait before buying. Osisko, however, is the least overvalued of the royalty stocks and can be bought on a pullback. Mike Cintolo, Cabot Top Ten Trader We'll have to see if the overall environment changes, but the combination of plunging interest rates, slowing economic growth, tariffs and general uncertainty remains a boon for precious metals, with gold and silver stocks remaining in steep uptrends. Wheaton Precious Metals is a major player in the streaming sector -- whereas a royalty gives a firm a percentage of sales, streaming allows a company to buy output at a set, low price in exchange for pre-funding portions of a mine. (Wheaton's per-ounce cash costs in the second quarter were $420 for gold and $5.14 for silver.) All told, Wheaton has streaming agreements with 19 mines in operation, as well as another nine in development, and in recent times, business has been mixed -- the second quarter saw an 11% bump in gold output and a 19% drop in silver output (mostly due to one streaming agreement being terminated), with overall sales and earnings falling sharply. But investors see the writing on the wall here: Wheaton's sales prices in the second quarter averaged $1,320 for gold (13% below current spot prices) and nearly $15 for silver (18% below), so as those catch up to reality and output picks up steam (production should increase from 690,000 this year to an average of 750,000 during the next five years), the company's bottom line should jump. Even with the hard times, Wheaton cranked out a 23%-plus profit margin in the second quarter, showing the power of the business model. Analysts see earnings up 10% this year before a 30%-plus gain in 2020, but that could prove conservative if gold and silver remain in bull markets. The company will be hosting an analyst day on September 25. Like most of its peers, Wheaton Precious Metals changed character in late May, when it began a steep, persistent uptrend. Granted, there have been a couple of pullbacks along the way, but buyers have generally stepped up to the plate near the stock's 25-day line. Try to get in on dips.

A Safer Way to Invest in Gold Miners: Royalty Streamers

Four top ideas among gold royalty streamer stocks.

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