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Royalty and streaming company Royal Gold (NASDAQ:RGLD) offers investors an attractive way to invest in precious metals. Instead of taking on the risk to develop a mine, Royal Gold acquires a revenue stream by supplying capital to mining companies. This approach limits its risk while enabling it to generate free cash flow and make additional acquisitions. While that is a great business model, there are three precious metals stocks that I think are better options than Royal Gold.

Same model, more diversification

Fellow royalty and streaming company Franco-Nevada (TSX:FNV) offers investors a similar business model to Royal Gold but with a purer focus on precious metals and with more diversification. For example, while 75% of Royal Gold's revenue comes from gold production and a small sliver from silver production, the bulk of its remaining revenue comes from other metals including lead, zinc, and copper. While those metals provide some diversification benefits, they also limit Royal Gold's upside potential in a rising precious metals environment.

Contrast this with Franco-Nevada, which gets 66% of its revenue from gold, 21% from silver, 7% from the platinum metals group, 5% from oil and gas royalties, and the final 1% from other metals. Add it up, and 94% of the company's revenue comes from precious metals. Further, its focus is not just on gold like Royal Gold, but the entire precious metals sector. It is also worth noting that Franco Nevada's portfolio includes 340 assets, including nearly 150 exploration assets, while Royal Gold has less than 50 assets in its portfolio. Bottom line, Franco-Nevada's focus on precious metals and its diversification make it a better option.

The low-cost leader

Speaking of a focus on precious metals, that's where Silver Wheaton (NYSE:WPM) shines. The company only owns precious metal streaming agreements, which simplifies its portfolio and provides investors with 100% exposure to silver and gold prices. Further, while it does have a much smaller portfolio, with 22 operating mines and eight development projects, these streaming agreements all come with low fixed acquisition costs for future production. Because of this, Silver Wheaton locks in its costs, whereas several of Royal Gold's deals are typically for a percentage of the spot price.

For example, Royal Gold has two streaming agreements with gold mining giant Barrick Gold (NYSE:GOLD) at its Pueblo Viejo mine. Under the terms of the gold agreement, Royal Gold pays 30% of the spot price of gold until production reaches a certain level, after which it pays 60% of the price of gold. Contrast this with Silver Wheaton, which locked in a low cost of $403 per ounce of gold for all of its future production through 2020. Because of that, it captures all of the upside as long as gold is above that level. It is Silver Wheaton's purity to precious metals and its fixed costs that make it a better streaming stock.

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The transformation has begun

One of the draws of precious metal royalty and streaming companies is their lower risk profile compared to mining companies. Aside from having no operational risk, they don't have any exploration risk, such as from projects that go way over budget. These risks are all too familiar to Barrick Gold, which ran into cost overruns leading it to spend more than $5 billion building a mine in South America only to stop work in 2013 because of a range of issues.

That said, despite the risks of owning a mining stock, there's a lot to like about Barrick Gold these days. The miner has turned its focus away from growing for the sake of growth and toward becoming the best value creator in the sector. This shift has the company shedding high-cost assets and debt as it transforms into a low-cost miner that will eventually be debt-free and can generate free cash flow in any gold price environment. It's a plan that has tremendous upside as the company continues to take steps toward the Barrick Gold of tomorrow, which makes it a top gold stock to own in the future.

Investor takeaway

While there's a lot to like about Royal Gold, there's simply more to like at Franco-Nevada, Silver Wheaton, and Barrick Gold. Each has something unique to offer, which provides investors the potential for more upside and better downside protection. That stronger risk-reward profile is why I think investors should ignore Royal Gold's stock and dig into one of those three instead.