With prices rising as much as 21% last August, gold looked to be bouncing back last year from the slide it has endured since 2013. Donald Trump's election put an end to that climb, though: From the election to the end of December, the price of gold fell nearly 11%.
In the midst of this volatility, shares of Royal Gold (NASDAQ:RGLD) climbed more than 70%. Identifying itself as a "lower-risk investment opportunity," Royal Gold operates as a royalty and streaming company, providing investors interested in gold with an alternative to gold-mining companies. Let's dig into the company's performance in 2016 and see what we can expect in 2017.
Although Royal Gold receives royalties from numerous metals, including silver, copper, lead, and zinc, the company's revenue is primarily generated from gold -- 85% in fiscal 2016. Reporting fiscal 2016 revenue of $359.8 million, Royal Gold, whose fiscal year ends on June 30, saw a 29.4% increase over the $278.0 million in revenue it reported for fiscal 2015. This performance translated to adjusted EBITDA of $259.8 million for fiscal 2016 -- a 20% increase over the $216.5 million it reported in fiscal 2015.
Streamlining its portfolio, Royal Gold invested approximately $1.3 billion in stream interests during fiscal 2016. Unlike royalties, a metal stream is a purchase agreement that provides the right to purchase all or a portion of one or more metals produced from a mine, at a price determined for the term of the agreement, in exchange for an upfront deposit payment.
Of the $1.3 billion in investments, Royal Gold acquired a gold stream on the Andacollo copper-gold mine in fiscal 2016, terminating the previously held royalty. One of the primary contributors to Royal Gold's revenue growth last year was the Andacollo mine, operated by Teck Resources Limited. In its annual report, management acknowledged that the new deal will help "offset the declining gold grade profile at the mine and is expected to provide revenue to Royal Gold for the next several decades."
In addition to Andacollo, Royal Gold acquired a gold and silver stream at the Pueblo Viejo mine in the Dominican Republic. Closing on the $610 million transaction with Barrick Gold in September 2015, Royal Gold reported $39.7 million in revenue from Pueblo Viejo in fiscal 2016. According to management, this is just the beginning of a beautiful relationship; it expects production to extend through the next several decades.
Eye on 2017
Yet another highlight from last year, Royal Gold entered into a $175 million agreement with New Gold for the acquisition of a gold and silver stream at the Rainy River project in Ontario. Production at the mine is expected to begin in the middle of the calendar year, but because Royal Gold's fiscal year ends June 30, it's unclear how much -- if at all -- the stream will contribute to the company's fiscal 2017 revenue. Management estimates that Rainy River has a 14-year mine life and will "become a strong revenue contributor when production commences."
Expecting to close on the transaction during either the first or second quarter of fiscal 2017, Royal Gold will amend its existing streaming agreement with Centerra Gold. Whereas Royal Gold currently has a 52.25% gold streaming interest at the Mount Milligan gold-copper mine, this will be reduced to 35%; however, Royal Gold will also obtain an 18.75% copper streaming interest in the deal. Of the 111,000 gold ounces, which it received in stream deliveries from Mount Milligan in fiscal 2016, Royal Gold sold approximately 108,800 ounces, accounting for $125.4 million in revenue.
We've looked at what's behind Royal Gold and what's ahead, so let's turn our attention now to its stock. One thing to remember when evaluating companies that deal in gold is that assigning a value to an asset, like a mine, is far from cut and dried; consequently, companies may take large writedowns on their assets, resulting in skewed earnings figures. For example, Royal Gold in fiscal 2016 reported $98.6 million in impairment charges from its Phoenix Gold project. One figure that can't be manipulated, though, is cash flow, so forgoing the traditional price-to-earnings ratio, let's consider the stock in terms of its cash from operations.
According to Morningstar, Royal Gold is currently trading at 19 times operational cash flow -- much more attractive than the 33 it was trading at last summer. And considering the three-year average is 24.1 times operational cash flow, the current valuation seems even more enticing.
It seems insufficient to consider only one valuation metric, so let's also look at its price-to-sales ratio on a trailing-12-month basis. Trading at about 11 times sales, shares look reasonable in light of the fact that the stock's five-year average is 14.5, according to Morningstar.
To provide more context for the stock's valuation, let's consider it alongside its peers: Franco-Nevada Corporation (TSX:FNV), Sandstorm Gold (NYSEMKT:SAND), and Silver Wheaton (NYSE:WPM). In terms of both operating cash flow and sales, Royal Gold seems like quite a bargain.
Overall, considering where shares are trading today, the stock -- though not a screaming buy -- seems attractively priced.
Although shares of Royal Gold enjoyed quite the ride in 2016, there's no guarantee it will continue flying higher through 2017. Wall Street, however, seems to be slightly undervaluing the stock, and I wouldn't be surprised if shares rise more in the coming year -- though not as much as last year. With a diversified portfolio of 38 producing mines, Royal Gold certainly represents a reasonable consideration for investors looking to gain exposure to the gold industry.