When most people think of a gold stock, giants like Barrick Gold (NYSE:GOLD) and Newmont Mining (NYSE:NEM) usually come to mind. That makes complete sense since they are among the largest players in the gold-mining industry. However, if you are looking for a gold stock with incredible profit margins throughout the entire commodity cycle, then it's Royal Gold, Inc. (NASDAQ:RGLD) that you should be thinking about. Here's why.

Reversals are the norm

Gold is a cyclical business prone to booms and busts. Although not desirable, this makes a lot of sense. Essentially, when gold prices are heading higher, new projects get started, but it can be years before meaningful new production arrives. That means that an imbalance of supply and demand can continue to push prices higher for a while, leading to even more new-project plans.

A man standing at the mouth of a mine.

Image source: Getty Images.

As new production starts to come online, however, supply begins to outstrip demand and gold prices fall. But by that point, it's too late to stop all of the expansion projects that got underway when prices were heading higher. As more production comes on, gold prices fall even further. Boom leads to bust and, eventually, the excess supply gets worked off. Then the entire process starts over again.

The last peak for gold was in 2011, just before the commodity bust took gold and a lot of other things with it. Before the bust, Barrick Gold and Newmont Mining had gross margins above 50%. Their EBITDA (earnings before interest, taxes, depreciation, and amortization) margins were up in the same range. That's pretty impressive, but it couldn't last.

NEM Gross Profit Margin (TTM) Chart

NEM Gross Profit Margin (TTM) data by YCharts.

As the commodity downturn played out, Newmont saw its gross margin shrink as low as 35%, and Barrick's hit a nadir of 25%. EBITDA margins for both fell into negative territory. With gold prices up from their lows, margins are heading higher again. But there's still a long way to go before they return to their 2011 peak.

Besting the bunch

Now compare that to Royal Gold. In 2011 this company had gross margins of around 90%, and its EBITDA margins weren't far behind. At the worst of the commodity downturn, its gross margin fell to roughly 80%. Its EBITDA margin, meanwhile, never dipped into the red, hitting a low of around 37.5%. Hands down, Royal Gold beats Barrick and Newmont when it comes to profit margins.

RGLD Gross Profit Margin (TTM) Chart

RGLD Gross Profit Margin (TTM) data by YCharts.

In fact, Royal Gold's strong results have allowed it to increase its dividend every year for 16 consecutive years. Remember that this period includes both a large gold-price advance and a deep gold-price decline. That 16-year streak is a testament to the strength of Royal Gold's business model, which is really important for investors to understand.

A different way to play it

Royal Gold is a precious metals company, but it isn't a gold miner; it's a streaming company. That means it gives miners cash up front for the right to buy gold and silver at reduced rates in the future. As an example, Royal Gold inked a streaming deal with Barrick Gold in 2015.

Barrick got $610 million in cash that it used to shore up its balance sheet. Royal Gold got the right to buy gold and silver from the Pueblo Viejo mine in the Dominican Republic (one of the largest gold mines in the world) for 30% of spot prices until certain production targets are hit, and 60% thereafter.

That locks in low prices for Royal Gold no matter what commodity prices are doing. And Royal Gold doesn't have to lift a finger: It leaves the mining to, well, the miners. It's easy to see why Royal Gold likes deals like this, but why would a mining company? The answer is that streaming deals offer miners an alternate source of funding when other options, like capital markets and banks, aren't desirable choices.

It's really best to think of Royal Gold as a specialty finance company that owns a portfolio of mine investments. In fact, the company has just 22 employees! Talk about low-cost operations (that helps explain the high margins). Its portfolio, meanwhile, includes 38 operating properties and 193 total investments. If you are looking for a highly profitable gold stock that holds up well in both good and bad commodity markets, Royal Gold should be at the top of your list.

Let the profits roll

There's nothing wrong with Barrick Gold or Newmont Mining; they operate just like any other gold miner would. However, that means frequent wide swings in profitability -- something that this pair's gross margins and EBITDA margins prove out. If you'd prefer a gold investment that can sustain its profitability at elevated levels through the good and bad times, however, Royal Gold is probably going to be more your speed. And you'll get to collect a growing dividend for your troubles. The streaming model is a little different, but the results prove the model's value.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.