The effect of lower gold prices on mining firms has been quite noticeable throughout 2013. As uncertainty regarding the metal continues, most companies are having an increasingly hard time obtaining funding, especially those without strong cash flow levels. In addition, banks are less willing to give out loans to those unable to generate significant cash flow, thus leading to the cease of development projects and reinvestment.
Yet unlike gold mining firms such as Barrick Gold Corp. (NYSE:ABX) or Golden Star Resources Ltd. (GSS), Royal Gold Inc. (NASDAQ:RGLD) does not own and run its own mines, but rather offers cash for participation in other companies’ operations. Whether this is beneficial or a further obstacle in the current market will become clear by the end of this article.
A great example of the obstacles Royal Gold faces is its stake in Barrick’s Pascua-Lama project, which has been put on hold due to a lack of funding. Since the mine belongs to Barrick, Royal Gold simply cannot do anything to get the project back on track. Hence, despite investing heavily in the promising Argentine/Chilean operation, the firm has yet to see returns.
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- RGLD 15-Year Financial Data
- The intrinsic value of RGLD
- Peter Lynch Chart of RGLD
What really comes to light here, is the effect that gold prices have on a company that relies on others for gold production. So although Royal Gold is not affected by shrinking margins due to the declining gold price, it must still take a blow to profitability when its partners are struggling to increase output. The risks of investing in such a firm are clear, especially given the turbulence in the gold market.
Nevertheless, the upside is also evident: As cash becomes increasingly rare in the industry, Royal Gold has seen business opportunities increase significantly. More and more gold miners are looking for additional funding for new projects, which the company can provide in hope of making solid profits over the coming years. Also, Royal Gold is still generating revenue from deals made a few years back, allowing it to shield itself from the current situation.
Not Just Gold
Another upside to Royal Gold is the diversification of its portfolio. Unlike major mining companies such as Barrick or Newmont Mining Corporation (NYSE:NEM), this firm does not concentrate all its efforts on gold, but rather has a stake in several commodities, including copper. Exposure to the wider natural resource market thus opens new opportunities for Royal Gold, especially when money is tight in the precious metals sector. One such example is the partnership with Teck Resources (TCK), which at least until now, looks quite promising.
Mining with Less Risk
As the price of gold is at an all-year low, many believe the time has come to buy into gold miners at a discount, while waiting for the price of the metal to recover. Yet the risks involved are great, and thus investing in a company such as Royal Gold might be a solid alternative. And, the timing is actually quite perfect, as potential clients are currently desperate for cash. So it is in these times of need that the company can obtain profitable contracts, and thus, it becomes rather clear why investment gurus the likes of Chuck Royce, Steven Cohen, and Jim Simons are currently Royal Gold bulls. If there is a way to profit from the gold market without financing, development, and political risks present in gold mining, this is definitely it.
Of course sometimes projects can go wrong, as occurred with Barrick’s Pascua-Lama project, yet in the long-run the partnerships tend to pay off. Also, the recent obstacles Royal Gold is facing has brought down share price, creating a great opportunity for investors to buy into the stock. Overall I feel bullish regarding this company, and expect it to fare well over the coming year and even outperform once the Pascua-Lama project is completed.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.