Royal Gold, Inc. (RGLD 0.43%) shares have fallen a little more than 10% off of the highs reached in the middle of 2016. It's been a bit of a roller coaster ride for the gold and silver streaming company, but the end result speaks for itself. You might be wondering if Royal Gold is running out of steam or just taking a breather... The answer in the precious metals industry isn't as clear cut as that, here's why the forecast for Royal Gold is still positive.
Follow the yellow bricks
At its core, Royal Gold is a gold and silver company. That means that the shares are going to be heavily influenced by the often volatile price of precious metals. The performance over the past year proves that point, with gold prices falling from around $1,290 an ounce to a recent price around $1,245. Royal Gold's shares tracked closely with the ups and downs in between those endpoints.
Image source: Getty Images.
But Royal Gold does things a little differently when it comes to gold and silver. It's a streaming company. That means that it pays miners cash up front for the right to buy gold and silver in the future at reduced prices. Miners use the cash to pay for new mines and expansion projects, or simply to pay down debt. That's useful to the miners because there are times when capital markets and banks aren't willing to provide them with good terms. Royal Gold, and competitors like Franco-Nevada and Wheaton Precious Metals, like these deals because they lock in low costs.
For example, Royal Gold and Barrick Gold (GOLD -1.02%) struck a streaming deal in 2015 in which Barrick received $610 million up front. Royal Gold, meanwhile, got the right to purchase gold and silver from the Pueblo Viejo mine for 30% of the spot price up to certain production levels and then 60% thereafter. That locks in a nice profit margin for Royal Gold even if the mine's costs shift higher because of things like increasing labor costs. And those big margins are still there even if gold prices fall, leading to less revenue on the top line.
Royal Gold's business model. Image source: Royal Gold, Inc.
Bought and paid for
Which is why you should step back and look at Royal Gold's portfolio of investments and not simply track the price of gold. There's no question that Royal Gold's business results will wax and wane with the prices of gold and silver. But it can maintain high profit margins (79% over the past year) even if precious metals prices fall and development projects that are working toward completion can keep production moving higher with no extra investment.
That's what's taking place right now. The company reported an 11% increase in gold equivalent production year over year in its fiscal third quarter. And CEO Tony Jensen noted:
"...we look forward to three new or expanding sources of revenue currently in development, including New Gold's Rainy River mine, Barrick's Cortez Crossroads mine, and Goldcorp's Pyrite Leach Project at the Peñasquito mine. We expect these new projects to be commissioned in calendar 2017, 2018 and 2019, respectively, providing further growth and revenue diversification."
The key: it doesn't have to put another penny into any of these projects.
Some big projects at Royal Gold over the next few years. Image source: Royal Gold, Inc.
That's a pretty positive outlook for production, a key fundamental factor that often gets lost when gold and silver prices are moving around. For reference, Barrick Gold lowered its 2017 production guidance by 5% in April and production fell around 11% between 2014 and 2016. Royal Gold's production hit a record high in fiscal 2016. And because of the new projects, the future for Royal Gold's production looks pretty good, too. As long as precious metals prices don't fall off a cliff its overall business should hold up relatively well.
Digging deeper
In some ways what's happening to Royal Gold's stock price is to be expected. After all, it is a precious metals company. But when you look beneath the surface it's not your typical mining stock and that makes a very big difference. In this case, Royal Gold has "production" set to come online over the next few years that won't cost it anything. In this respect, Royal Gold isn't taking a breather at all and the trajectory is still positive. Keep an eye on gold prices, but don't forget to watch Royal Gold's "bought and paid for" production growth. That's where the action is today.
