The Proven Way to Invest in Gold

The critics of Royal Gold have been proven dead-wrong. Nearly a decade has passed since a memorable article appeared in Barron's declaring that shares of Royal Gold (Nasdaq: RGLD  ) looked overvalued. The stock cratered by 33% on the day the article appeared, and closed the session at $13.10 per share.

When Royal Gold's shares touched $100 just over a month ago, some investors took a moment to thank gold sage Jim Sinclair -- chairman of Tanzanian Royalty Exploration (NYSEMKT: TRX  ) -- for defending Royal Gold at the time with his fully vindicated rebuttal. Of course, we can now state most emphatically that Royal Gold was not overvalued at the time, and presently I would like to point out that the stock still has plenty of room to run within the ongoing bull market for gold.

Growth from producing assets
Royal Gold delivered earnings this week for its fiscal first quarter of 2013, which featured record royalty revenue of $77.9 million. That's an impressive 21% surge over the prior-year mark despite a 3% dip in the average realized gold price! The company's golden trio of cornerstone mines each contributed to the bonanza.

  • Teck Resources' (NYSE: TCK  ) achieved record output at its Andacollo copper mine with the addition of a pre-crushing circuit.
  • In an achievement I celebrated here, Goldcorp (NYSE: GG  ) recorded terrific production results at Peñasquito despite an ongoing scarcity of water for the mill.
  • And Vale's (NYSE: VALE  ) Voisey's Bay mine came through with increased volume of copper concentrates to chip in for 12% of Royal Gold's first-quarter-royalty income.

Together, these three cornerstone assets accounted for more than half of the company's consolidated income, and investors looking to project long-term-cash-flow expectations for the company need to pay special attention to these mines. I happen to own all three of the above mining stocks, and encourage readers to track my ongoing coverage by bookmarking my article list or following me on Twitter.

Looking forward, Royal Gold President and CEO Tony Jensen expects "further incremental production increases from Andacollo, Peñasquito, and Canadian Malartic in the coming quarters." I also own shares of Osisko Mining (UNKNOWN: OSKFF.DL  ) for exposure to the ongoing ramp-up of its Canadian Malartic mine, and I share Jensen's outlook for looming production growth from each of those three.

Organic growth from currently non-producing assets
Royal Gold does have some tangible growth to look forward to within its existing portfolio of producing royalties, but the real growth story comes from assets that have yet to enter production and the deals that have yet to be signed. Dominating the first category is the phenomenal Mt. Milligan copper and gold mine, in which Royal Gold holds a stream deal covering 52.25% of gold production over the life of Thompson Creek Metals' (NYSE: TC  ) emerging flagship operation. Royal Gold's share will correspond to roughly 136,000 attributable ounces per year in the early going, before scaling back to a long-term average of about 102,000 gold ounces over a 22-year mine life.

Commercial production at Mt. Milligan is scheduled to begin toward the end of 2013, with the resulting expectation for roughly $157 million in additional annual EBITDA beginning as early as 2014 (using current gold prices). Relative to the $71 million in EBITDA reported for the fiscal first quarter, the Mt. Milligan gold stream alone would represent roughly a 55% increase in quarterly EBITDA! By 2014, however, I see a very strong likelihood that gold will trade well beyond $2,000 per ounce, requiring a nice upside adjustment to those EBITDA projections. Some may disagree with that bullish gold price scenario, but fair warning: They may be some of the same folks who considered Royal Gold overvalued at $18 per share!

Mt. Milligan may be the golden nugget in Royal Gold's development-stage asset portfolio, but it's not the only one. Barrick Gold's (NYSE: ABX  ) Pascua Lama project will likely enter production sometime during the second half of 2014, and Royal Gold suffers no distress from the major cost escalation that has characterized the project to date. That's part of the beauty of these mine royalty and streaming business models, and a major factor in the incredible outperformance of Royal Gold and its peers over both gold itself and the mining stocks at large over the past several years.

Growth in the deals that have yet to be signed
With more than $1 billion in available liquidity to work with, Royal Gold is very well-positioned to ink further accretive royalty or streaming deals during this opportune moment when multiple mine developers face a difficult task in raising construction capital within a constrained credit environment. With strong and growing cash flows, in fact, the entire royalty and streaming group is on a sound footing to forge further strategic growth going forward. I have focused my own investment interest upon Sandstorm Gold (NYSEMKT: SAND  ) , but ultimately I believe that Sandstorm, Franco-Nevada (NYSE: FNV  ) , Silver Wheaton (NYSE: SLW  ) , and Royal Gold will all share in a continuum of celebrated profit growth that will continue to confound critics, while heaping profits upon savvy long-term investors.

Hoping to spot tomorrow's outperformers in gold? Download The Motley Fool's special free report, "The Tiny Gold Stock Digging Up Massive Profits." Our analysts have uncovered a little-known gold miner they believe is poised for greatness; find out which company it is and why its future looks bright -- for free!

Fool contributor Christopher Barker owns shares of Goldcorp (USA), Osisko Mining, Silver Wheaton (USA), Thompson Creek Metals Company, Sandstorm Gold, Teck Resources Limited (USA), and Vale. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 02, 2012, at 10:06 PM, Jbay76 wrote:

    Sinch, since you're on teh topic of gold investments, any idea of what RBY's propsects are? I just can't figure out why its shares are being beat and held down so. Maybe I haven't been paying enough attention and missed something over the span of 5 months.

    Thanks

    J

  • Report this Comment On November 03, 2012, at 7:25 AM, skypilot2005 wrote:

    Sinchi wrote:

    " I have focused my own investment interest upon Sandstorm Gold (NYSEMKT: SAND ) , but ultimately I believe that Sandstorm, Franco-Nevada (NYSE: FNV ) , Silver Wheaton (NYSE: SLW ) , and Royal Gold will all share in a continuum of celebrated profit growth that will continue to confound critics, while heaping profits upon savvy long-term investors."

    http://finance.yahoo.com/news/sandstorm-gold-reports-record-...

    10/25/12

    Sandstorm Gold Reports Record Revenue in Q3, 2012

    VANCOUVER, BRITISH COLUMBIA--(Marketwire - Oct 25, 2012) - Sandstorm Gold Ltd. ("Sandstorm" or the "Company") (TSX VENTURE:SSL)(NYSE MKT:SAND) is pleased to announce its unaudited results for the third quarter ended September 30, 2012 (all figures in U.S. dollars).

    Third Quarter Highlights

    • Record revenue of $15.1 million.

    • Gold sales of 9,066 ounces.

    • Operating cash flow of $10.6 million.

    • Average cash cost per ounce1 of $408 resulting in cash operating margins2 of $1,258 per ounce.

    • Net income of $4.9 million.

    • The Company''s common shares began trading on the NYSE MKT LLC under the symbol SAND.

    • The Company agreed to contribute up to $10.0 million towards the Phase 1 Expansion at Luna Gold Corp.''s Aurizona Mine. In conjunction with Sandstorm''s capital contribution, Luna has provided the Company with a contractual guarantee that the Aurizona Mine will complete its Phase 1 Expansion by the end of 2013.

    • The Company entered into a precious metals purchase agreement with Colossus Minerals Inc. to purchase an amount equal to 1.5% of the gold and 35% of the platinum produced from the Serra Pelada Mine located in Para, Brazil.

    President & CEO Nolan Watson commented, "Q3 was another strong quarter for Sandstorm in terms of revenue and cash flow and we were able to increase our growth profile with the addition of the Colossus Minerals precious metals stream and the expansion commitment by Luna Gold. We are focused on acquiring additional gold streams and with over $150 million in available capital, we are well capitalized to do it."

    Outlook

    Based on existing gold stream agreements, the forecasted attributable production for 2012 is 31,000 to 34,000 ounces of gold, increasing to over 60,000 ounces of gold equivalent per annum by 2015.

    Further details of the individual gold streams can be found within Management''s Discussion and Analysis contained in the Company''s third quarter 2012 report and on the Company website

    Sky

  • Report this Comment On November 03, 2012, at 7:30 AM, skypilot2005 wrote:

    FYI, "Sister" company.

    http://finance.yahoo.com/news/sandstorm-metals-energy-increa...

    11/1/12

    Sandstorm Metals & Energy Increases Copper Stream with Donner Metals

    11/1/12

    As part of the transaction, Sandstorm Gold Ltd. ("Sandstorm Gold") has agreed to increase its gold stream to purchase 24.5% of the gold and gold equivalent of silver from the Bracemac-McLeod Mine, in exchange for making a payment to Donner (via a back-to-back agreement between Sandstorm Gold and Sandstorm Metals & Energy) of US$3 million. Sandstorm Gold will make ongoing per ounce payments equal to the lesser of US$350 per ounce of gold or gold equivalent and the then prevailing market price of gold. In addition, Sandstorm Gold has agreed to provide Donner with a US$2 million loan via a draw down facility, bearing 7% interest and expiring on February 1, 2014.

    Sky

    Long both Sandstorms and Donner

  • Report this Comment On November 03, 2012, at 8:00 AM, skypilot2005 wrote:

    http://ramblermines.com/files/2012-10-29%20-%20Rambler%20-%2...

    10/29/12

    “Rambler’s Ming Mine Moves into Commercial Production &

    Notification of Load Readiness for First Copper Concentrate Shipment

    “During September, the Company scheduled a brief ten‐day shutdown period to complete a number of maintenance items and begin the process of preparing the plant for the upcoming winter season. Of significant importance during the shutdown was the completion of piping required to run floatation tailings back to the hydromet (CIP circuit) to improve overall gold recovery. To date, gold in run of mine ore has been averaging 1.0 to 1.5 g/t with recovery to the concentrate in line with initial lab testing. By routing flotation tailings back through the CIP circuit laboratory testing has shown that overall gold recovery can be further improved to 85%, allowing for a gold doré to be poured along with the production of copper concentrate.

    With an anticipated increase in gold head grade in the coming months, it’s important to have this work

    completed now so that gold recovery can be maximized as head grades improve. Production at the mill was re‐started on 21 September 2012 and the plant testing for improved gold recovery will begin before the end of the calendar year.”

    Sinchi,

    I think this is a gold and copper “Two for the price of one special”. I quadrupled my position yesterday.

    Sky

    Re: http://www.ramblermines.com/

    Don’t hesitate to let me know if I am throwing too much up on your blog or articles. It’s just my way of paying you back for your great research over the years.

  • Report this Comment On November 03, 2012, at 8:14 AM, skypilot2005 wrote:

    Donner F.Y. I.:

    http://sandstormgold.com/projects/bracemac_mcleod/

    “Sandstorm has a gold stream agreement with Donner Metals Ltd. (TSXV:DON)” DONFF (OTC)

    Sky

  • Report this Comment On November 03, 2012, at 8:31 AM, skypilot2005 wrote:

    Rambler - Sandstorm:

    http://sandstormgold.com/projects/ming/

    “The Ming Mine is a past producing underground massive sulfide copper-gold mine located in northwestern Newfoundland and operated by Rambler Metals & Mining PLC (TSXV:RAB, AIM:RMM). The area has a strong history of gold, base metal and industrial minerals mining.”

    Sky

  • Report this Comment On November 03, 2012, at 1:49 PM, XMFSinchiruna wrote:

    Rambler Metals & Mining is among my top 10 largest holdings.

  • Report this Comment On November 04, 2012, at 10:40 PM, skypilot2005 wrote:

    Interesting article I ran across, today:

    http://ceo.ca/nolan-watson-interview/

    Conscience of a Gold Miner – Nolan Watson Interview

    POSTED ON SEPTEMBER 18, 2012 BY TOMMY HUMPHREYS AND TEKOA DA SILVA

    Sky

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