Precious metals have been popular vehicles for storing value and showing off your social status for millennia (just ask the ancient Egyptians). It may be 2017, but gold and gold stocks still have a certain level of allure among investors, and the latter can play a role in an investment strategy that seeks to build long-term wealth.
Unfortunately, many gold mining companies haven't been great long-term investments. Most have lost value in the last 10 years, while 20-year returns are either negative or well behind that of the S&P 500. But you know what they say: Buy low. If you're interested in buying gold stocks now, then you should consider digging deeper into Barrick Gold (GOLD 1.68%), Goldcorp (GG), and Royal Gold (RGLD -1.09%).
Image source: Getty Images.
Gold mining leaders
Barrick Gold and Goldcorp are among the best gold mining stocks on the market. They're worth a combined $30 billion and wield diverse holdings of mining assets spread across the globe. The companies are returning to reliably profitable operations after years of losses, selling off non-core assets, and racing to strengthen their balance sheets.
The results so far are encouraging, although somewhat mixed. In the first quarter of 2017, Barrick Gold sold 1.31 million ounces of gold and 95 million pounds of copper, compared to 1.28 million ounces and 111 million pounds, respectively, in the year-ago period. The cost of sales for both metals increased year over year, although higher selling prices have allowed the miner to steadily improve gross profits in each quarterly period dating back to the first quarter of 2016.
Meanwhile, Goldcorp managed to improve its gold cost of sales during the first quarter of 2017 compared to the same period of last year, although volumes sold decreased 17% in that period. The miner still managed to improve operating income following reduced corporate expenses.
The most recent quarterly performances may not be that impressive to investors, but each demonstrates progress as part of a noteworthy long-term plan. For instance, both companies have announced asset sales and the formation of strategic joint ventures to lower costs and spread risks.
In March, Barrick Gold sold a 50% stake in its Veladero mine in Argentina to Shandong Gold Group for $960 million, and the pair will begin exploring ways to jointly develop several world-class mines in South America. Details will follow in the next few weeks. In addition, management is working to reduce debt from $7.9 billion to $5 billion by the end of 2018 -- essentially all of which doesn't mature until after 2032.
Not to be outdone, Goldcorp divested $500 million in non-core assets in the first quarter as part of a plan to slash operating expenses by $250 million each year. Management also has a 20/20/20 plan in place that seeks to increase gold production 20%, increase gold reserves 20%, and reduce all-in sustaining costs 20% in the next five years.
And of course, Barrick Gold and Goldcorp announced the formation of a 50-50 joint venture for an asset in Chile that spans 50,000 acres and holds 23.2 million ounces of proven and probable gold reserves.
All of the moves above are designed to increase profitability and operating cash flow, which, if successful, should allow these two gold stocks to return to growth. If any gold miners are going to achieve reliably profitable operations by the end of the decade, these two are a good bet.
Not your average gold stock
Royal Gold is a bird of a different feather. Rather than moving metric tons of earth to obtain just a few ounces of gold and other precious metals, the company makes all of its money through streaming and royalty agreements -- some of which are with gold mines owned by Barrick Gold and Goldcorp. No bulldozers, hardhats, or smelters required.
The unique business model allows for unprecedented operating cash flow, low-risk revenue streams, and the avoidance of financial and regulatory risks that continually plague gold miners. The stock has shredded the returns of the S&P 500 in the last decade as a result, but the growth may not be over just yet.
In the last three years, the company has nearly doubled its trailing-12-month revenue, increased operating cash flow 70%, and grown its dividend 13%. If the first nine months of fiscal 2017 are any indication, then new agreements and a recent reorganization of its streaming and royalty portfolio should allow that growth to continue for the foreseeable future in the current market environment.
Even better for investors is a pledge by management to increase the dividend alongside increases in operating income. So although the current yield of 1.2% doesn't make Royal Gold a dividend powerhouse, long-term investors will likely benefit from the awesome power of compound interest.
Investor takeaway
Despite their allure, gold and gold stocks have not been a very good investment over the last 10 or even 20 years. Mining anything is difficult, and trends in the selling prices for precious metals have been less than friendly to the industry. Is this time really going to be different? There are encouraging changes underway at Barrick Gold and Goldcorp that could move the companies in the right long-term direction, but there are sizable risks to gold stocks that are difficult to avoid. That's what makes Royal Gold such an interesting way to gain exposure to gold stocks -- and why it should top your list of gold stocks to buy now.
