Every gold and silver company will see its sales, profits, and growth prospects rise and fall in connection with the prices of precious metals. But unlike most of them, Royal Gold Inc. (RGLD 0.43%) can endure falling gold prices without as much pain on the bottom line, thanks to its business model of streaming. That partly explains why Royal Gold share are crushing those of pure miners like Barrick Gold (GOLD -1.02%): It's now up almost 26% year to date, while Barrick Gold shares are hovering just below where they started 2017.
But Royal Gold is also handily outperforming its streaming peers this year: Wheaton Precious Metals (NYSE: WPM) is barely in the green, and Franco-Nevada Corp (FNV -0.05%) is up about 20% year to date. If that makes you wonder whether there's any steam left in Royal Gold's recent rise, here are three solid reasons why the stock could move even higher in the coming months.
1. There's a strong earnings report around the corner
Gold prices may fluctuate, but miners can ramp up volumes to offset the impact of lower prices on their top lines. Royal Gold's gold equivalent ounces (GEOs) jumped 11% year over year to 87,700 ounces during its fiscal third quarter, which ended March 31, pushing its revenue up 14% even as its realized gold price moved up only about 3% during the period. Note that by volumes, I don't really mean production here, but rather the metals that Royal Gold buys from miners like Barrick Gold.
Image source: Getty Images
The thing is that streaming and royalty companies like Royal Gold and Wheaton Precious Metals don't own and operate mines; they buy streams of discounted precious metal from miners in return for providing them with the upfront funding they require to get operations underway. For example, in 2015, Royal Gold paid $610 million to Barrick Gold and secured the right to purchase a certain percentage of the gold and silver produced by the Pueblo Viejo mine, in which Barrick holds a 60% stake. It was a win-win for both parties: Barrick got instant financing for its capital projects; Royal Gold will get many years of buying metals at below-market prices. For instance, it will pay Barrick only 30% of the spot price on gold for the first 550,000 ounces it streams from Pueblo Viejo, and 60% of the spot price thereafter.
That explains why streaming is such a lucrative business: Royal Gold is not only insulated from the costs and risks associated with mining, but can secure metals at prices substantially below current market values. Pueblo Viejo is now adding substantial value to Royal Gold's top line.
Royal Gold ended its fiscal 2016 with record revenues. Going by the 25% growth in its revenues during the nine months ended March, it's almost certain that Royal Gold will report record sales and strong profits for fiscal 2017 when it announces its numbers in August. The stock should react positively to the news.
2. Three fresh revenue streams are coming up
As you might've already guessed, Royal Gold's growth depends on the number and kind of streams it acquires. However, because gold miners have been striving hard to cut costs and boost cash flows over the past year or so, they haven't needed to look for funds. That has meant slow business for Royal Gold, Wheaton Precious Metals, and Franco-Nevada – none of the three has struck a streaming or royalty deal yet in 2017.
That, however, doesn't mean that Royal Gold's growth is stalling. In fact, three developing or expanding mines that the company has agreements with are expected to go online over the next three years. They include Barrick Gold's Cortez Crossroads, Goldcorp's Pyrite Leach Project at Penasquito, and New Gold's Rainy River site. In other words, Royal Gold's growth story is intact, and I wouldn't be surprised if its GEOs continue to head north in coming years.
Image source: Royal Gold
Royal Gold has already invested in its future; now, it's just waiting to reap the fruits. As the developing mines start production, Royal Gold's top and bottom lines should expand, which should result in stronger cash flows and returns for shareholders.
3. Cash flows hitting record highs
Royal Gold generated record operating cash flow during the quarter ended March. See for yourself how consistently the company's operating cash flow has grown in the past decade, and what a remarkable job management has done in converting revenues to cash flow over time.
RGLD Cash from Operations (TTM) data by YCharts
This disciplined cash flow generation has proved rewarding for shareholders – Royal Gold is one of the best gold dividend stocks today, having increased its payout for 16 straight years and growing it a compound annual rate of 20% since 2000.
Meanwhile, Royal Gold is also strengthening its balance sheet while keeping enough buffers in borrowings and cash to enable it to take advantage of any opportunities that come up in the near future. Until then, the company has its growth plans in place, which should continue to reap rich returns for shareholders in the form of both growing dividends and stock price appreciation.
