Investors looking for exposure to gold and silver can't possibly go wrong with stocks like Hecla Mining Co. (HL -0.43%)and Royal Gold (RGLD -1.30%). Both companies have rapidly climbed the ladder over the years to make it to the top of their sector: Today, Hecla is one of the leading silver producers in the U.S. while Royal Gold is among the world's largest precious metals streaming and royalty companies.
Hecla's stunning recent run up has left investors feeling rich -- the stock nearly doubled in just the past year. Royal Gold hasn't fared badly either, piling on as much as 39% in a year as of this writing. That gives both stocks a lead over their peers, making them compelling buys today. But let's take a dive deeper into the two companies and compare.
Mining vs streaming
First things first: It's important to understand the difference in the way Royal Gold and Hecla make money.
Hecla owns several mines across North America, but primarily operates out of three currently. With 172 million ounces of silver in proven and probable reserves, Hecla is only slightly behind Coeur Mining (CDE -0.27%) which had 176.6 million ounces in silver reserves as of the end of 2016. As you might've guessed, Hecla is in the traditional business of extracting precious metals.
Royal Gold, on the other hand, doesn't own mines; it enters into "streaming" agreements with miners under which it pays them cash up front to support their projects, and gets metal streams in return. Streaming companies usually are paying prices substantially below spot rates for those metals, making it a lucrative business. Royal Gold has partnered with some of the biggest miners, including Barrick Gold and Goldcorp, and boasts a portfolio comprising 38 operating and 22 developing mines.
Now that you have a fair idea about their different business models let's get straight to the point.
The case for Royal Gold
Royal Gold has several things going right for it. It closed its fiscal 2016 (which ended on June 30) with record revenue and strong operating cash flows, thanks to higher deliveries from mines like Centerra Gold's Mount Milligan and Barrick-Goldcorp's Pueblo Viejo. It reported 9% higher revenue, an 87% jump in earnings per share, and record operating cash flows during its last quarter, almost confirming it's on its way to another record year.
That's just going to make Royal Gold's operational track record look even better. It has grown its revenues and operating cash flows at compounded average rates of 29% and 25%, respectively, during the decade through fiscal 2016. Not surprisingly, it has rewarded shareholders with 16 consecutive years of dividend increases -- a record hard to match in a commoditized industry.
I'd credit management's approach to turning downturns into opportunities for Royal Gold's incredible performance. For example, management struck several streaming agreements in 2014 and 2015 which are now major contributors to the company's revenue, including Pueblo Viejo, Teck Resources' Andacollo mine, and Golden Star Resources' Wassa and Prestea mines. With the company having secured interests in 22 high-potential developing mines including Barrick's Pascua-Lama, investors needn't worry about the growth in Royal Gold's top line in coming years.
The case for Hecla Mining
Much like Royal Gold, Hecla is firing on all cylinders, with revenues hitting record highs in 2016 backed by record silver production. That's not all: Hecla swung to a big profit last year versus losses in 2015, and expects production to inch even higher this year, primarily because of grade upgrades. In the precious metals business, the higher the ore grade, the more valuable the mine.
Another fact worth knowing: Two of Hecla's operating mines featured among the world's 10 most valuable ore mines in a recent list released by InfoMine's IntelligenceMine, as reported by Mining.com. Not surprisingly, Hecla is also among the industry's lowest-cost producers, projecting its by-product all-in-sustaining cost (AISC) to be around $11.5 per silver ounce this year. That's substantially below Coeur's reported AISC of $14.27 per ounce of silver for 2016. Indeed, even Pan American Silver (PAAS -0.27%) -- the world's second-largest primary silver producer -- was dealing with AISC above the $14 mark until last year, when it brought down its costs dramatically to $10.17 per silver ounce.
Top-grade mines, low costs, rapidly growing production – there's not much more you can ask from a miner to make a strong investment thesis.
The final lap: Why Hecla wins
The match-up between these companies is incredibly tough, but my vote goes to Hecla for its solid asset base and standing in a highly competitive industry. Or, to put it another way: Income investors might prefer Royal Gold, and growth investors are more likely to go for Hecla. Neither side would want to ignore Hecla after looking at this chart, though.
Hecla is, hands down, a steal at current prices despite its recent run up.