Precious metals streamer Royal Gold Inc. (RGLD, Financial) finished its 2021 fiscal year on a high note.
The highlights included a record financial performance, eliminating its debt and increasing its dividend for the 20th consecutive year.
However, Mr. Market wasn’t impressed. After a quick bump, the share price dipped, rose and dipped again. That means Royal may be undervalued.
Does this mean investors should take a closer look? Let’s first examine the fundamentals.
About Royal Gold
The Denver-based company is an active player in the precious metals industry without being a miner or manufacturer. Instead, it is a streamer and royalties collector, two businesses that comprise the company’s two segments:
- Stream interests: A metal stream refers to a contract that allows a company like Royal to make an upfront deposit to a mining company in exchange for the right to purchase all or a portion of one or more metals produced from a mine. Stream revenue made up 72% of Royal’s total revenue in 2019 and 2020.
- Royalty interests: Royalties come from non-operating interests in mining projects. Its investments give it the right to a percentage of revenue or metals produced by a mine. This represented 28% of the company’s total revenue in 2019 and 2020.
Recent activities
In the fourth-quarter and full-year earnings release for fiscal 2021, President and CEO Bill Heissenbuttel said the company had several strategic achievements during the past year:
- It provided funding to its base silver stream at the Khoemacau mine in Botswana and can purchase 84% of its payable silver (the mine recently produced its first concentrate).
- Sold its Peak Gold joint venture, which allows it to sharpen its focus on its core business.
- Made three recent gold acquisitions and was able to do so without diluting its equity.
- Increased its annual dividend for the 20th consecutive year.
- Extended its revolving credit through to July 2026.
- Will transition to a Dec. 31 year-end this year.
Recent results
Royal posted record revenue, earnings and cash flow for fiscal 2021:
- Total revenue in fiscal 2021 increased to $615.9 million, compared to $498.8 million in the previous year. The company attributed the improvement to average higher prices for gold, silver and copper, as well as increased production in the royalty segment.
- Net income and comprehensive income increased to $302.776 million from $196.250 million.
- Diluted earnings per share rose to $4.60 from $3.03 in fiscal 2020.
- It increased the dividend by 7%.
Competition
The company reported that the streaming and royalty businesses are “very competitive.” It competes with other streaming and royalty companies and with lenders, investors and other companies providing financing to operators.
Key competitive factors are identifying and evaluating potential opportunities, transaction structures and access to capital.
Competitors include Franco-Nevada (FNV, Financial), Wheaton Precious Metals (WPM, Financial), Sandstorm Gold (SSL) and Maverix Metals (MMX, Financial). The following chart compares the performance of Royal, Franco-Nevada and Wheaton against the S&P 500. As it indicates, Franco-Nevada has been the best performer, but all three royalty streamers lag the market index:
Financial strength
Royal is deserving of its 8 out of 10 rating for financial strength, in part because it has no debt. As the following chart shows, the company has been whittling down its leverage:
The table also shows the company’s return on invested capital is more than double its weighted average cost of capital.
The Piotroski F-Score indicates the company is well managed, and the Altman Z-Score confirms the company is in excellent financial condition.
Profitability
The company’s margins are strong. Looking more closely at the net margin, it is higher than 93% of its peers and competitors in the metals and mining industry.
The net margin also improved significantly over the past three years:
Return on equity and return on assets outperformed the industry averages as well. Specifically, the ROE for Royal is 12.68%, while the industry margin is -13.53%.
All three growth lines are positive; the first two are growing at reasonable rates, but earnings per share growth has been exceptional. Earnings have grown faster than revenue and Ebitda over the past three years, suggesting, too, that management has been making the company more effective and more efficient:
Dividends and share repurchases
Royal has steadily grown its dividend per share over the past decade:
But the dividend yield hasn’t enjoyed the much growth, because of the rising share price:
The dividend payout ratio is a relatively low 26%, so there is ample room for it to grow.
No shares were repurchased in fiscal 2021, and the company has given no indication it plans to reduce the count in the future. That would be consistent with what it’s done over the past seven years:
Valuation
The company receives a relatively high score for value: 8 out of 10. That’s backed up by the GF Value Line:
The PEG ratio points to fair valuation; it is at 0.96 in a range where 1 is considered fairly valued. That’s better than 52.42% of companies in the metals and mining industry and an improvement on its 10-year median of 2.64.
As the 10-year chart shows, the company’s share price is volatile and investors should aim to buy on a dip:
Gurus
The investing gurus have sold more shares than they have bought over the past two years:
Nine of them held positions at the end of June (also the end of Royal’s fiscal year). These are the three largest:
- First Eagle Investment (Trades, Portfolio) had a significant stake. After a reduction of 1.65%, it owned 3,418,946 shares, representing 5.21% of Royal’s shares and 0.98% of its fund holdings.
- Jim Simons (Trades, Portfolio)' Renaissance Technologies cut his position by 3.34% during the quarter and finished with 662,542 shares.
- Pioneer Investments, at the end of March, held 198,229, boosting its position by 376.84%.
Conclusion
Royal Gold has just come off a banner year, and with its acquisitions may perform even better in the next 12 months. As we’ve seen, it has no debt, making it financially sound and is quite profitable. The valuation markers suggest it is modestly undervalued to fairly valued, and might be even more attractive if the price dips even further.
But its performance has lagged that of Franco-Nevada, and both lag the S&P 500. The former does even better than Royal on financial strength (10 out of 10) and profitability (9 out of 10), but its valuation rating is only 4 out of 10. The S&P 500 outperforms both, but of course it does not pay a dividend.
Value investors might keep an eye on Royal. It has no debt, and if the price slips some more, there might be a margin of safety. Similarly, growth investors might watch for a lower price and take a position then. Income investors will want to skip the company because the dividend is not enticing at current share prices.
