Investors looking to get into gold stocks will undoubtedly come across Royal Gold (RGLD 0.88%) and Barrick Gold (GOLD 0.71%), which are among of the top two companies in the industry. But they couldn't be more different.
Whereas Barrick Gold is a traditional gold mining company that owns, develops, and mines precious metals from assets around the world, Royal Gold never so much as picks up a shovel. Instead, it makes all of its money from streaming and royalty agreements signed with gold mining companies (including the challenger in this matchup).
Does a difference in business models matter with regards to your investment decision? If so, which is the better buy: Royal Gold or Barrick Gold?
Image Source: Getty Images.
The matchup
Stacking up the businesses side by side hints that there are differences, even if they aren't immediately clear. Here's how they compare.
|
Metric |
Royal Gold |
Barrick Gold |
|---|---|---|
|
Market cap |
$5.0 billion |
$18.1 billion |
|
Dividend yield |
1.24% |
0.75% |
|
Revenue, 2016 |
$359.8 million |
$8,558 million |
|
PS ratio |
12.0 |
2.05 |
|
Price-to-book ratio |
2.23 |
2.16 |
|
Trailing PE ratio |
49.7 |
13.1 |
|
Forward PE ratio |
39.6 |
21.0 |
Data Sources: Google Finance, Yahoo! Finance.
Although Royal Gold boasts less than one-third of the valuation of Barrick Gold, it's much more expensive relative to trailing sales and earnings. Even though analysts expect the smaller peer to grow earnings in the next four quarters and lower its PE ratio in that span, it's still expected to be twice as expensive as its gold mining counterpart on an equivalent basis.
And yet, there's a pretty solid reason Mr. Market is giving Royal Gold the benefit of the doubt: its low-cost business model. While gross margin and operating cash flow have been improving for both companies, it's pretty much impossible for a gold miner saddled with regulatory and development risks to match the operational efficiency of a streaming company.
|
Metric (2016) |
Royal Gold |
Barrick Gold |
|---|---|---|
|
Gross margin |
79.2% |
40.7% |
|
Operating cash flow |
$169.9 million |
$2,640 million |
|
Operating cash flow as % of revenue |
47.2% |
30.8% |
Data Source: Google Finance.
It wouldn't be fair to completely disregard the tremendous progress achieved by Barrick Gold in the last couple of years. The miner has shed non-core assets and brought high-growth mines online, moves that have simultaneously lowered its operating costs and increased operating efficiencies. Essentially all of its debt -- which will be $2.9 billion, or 37%, lower by the end of 2018 -- matures in 2032 or later. And new partnerships with Shandong Gold Group and Goldcorp promise to spread risks and lower capital expenditures.
But here's the thing: Not only is Royal Gold benefiting from a lower-cost business model, it actually reaps the rewards from Barrick Gold's success. Most of the streaming company's revenue increase in the first nine months of fiscal 2017 was driven by a gold mine in the Dominican Republic that is owned by Barrick Gold. The financial agreement in place should continue to benefit the smaller peer as production is increased.
It's also important to take into account that Mr. Market seems to favor one business model over the other. Only one major gold stock has held its ground in the last five years, while all others have delivered sizable losses.
Which stock is the better buy?
When it comes to gold stocks, it's difficult to do much better than Royal Gold. The company's unique business model allows it to avoid more of the benefits of precious metals with fewer risks -- something the broader market seems to be accounting for in valuation and stock price. Better yet, a flurry of activity in the last year promises to keep the growth humming along for investors. If you're interested in the gold mining industry, then definitely give this stock a closer look.
