If you want to invest in gold, you should pay careful attention to the nuanced details of the investment opportunities available. There are several large, multibillion-dollar companies flush with cash and healthy operating margins to choose from. There are smaller players offering more in the way of potential than a long history of results. There are even streaming and royalty companies, consisting of nothing more than a few dozen individuals in an office providing capital to miners in return for wildly profitable future business.
In other words, the term "gold stocks" doesn't differentiate between the broad spectrum of companies toiling away in the name of creating (or attempting to create) shareholder value -- and that can get investors into trouble. With that in mind, I think investors should avoid Hecla Mining (HL 2.12%) and Tahoe Resources (NYSE: TAHO), and pay closer attention to Royal Gold (RGLD -0.80%).
Production delays mean stay away
Both Hecla Mining and Tahoe Resources struggled in 2017 after important mining assets were knocked offline. Unfortunately, while those events caused immense suffering for shareholders last year, not much has changed in the first two months of 2018. It could be another rough year.
Some of the woes at Hecla Mining are the company's own fault. Management attempted to end a labor dispute at its Lucky Friday mine by presenting a "take it or leave it" offer. Workers not only rejected the proposal, but the way in which the company conducted itself may also have run afoul of labor laws. The two sides are currently sorting out the affair in court.
The ongoing strike at Lucky Friday, which began in March 2017, has devastated precious-metals output for Hecla Mining. While the mine is still recording sales from inventory and very limited production from salaried employees, it contributed 78% less revenue last year than it did in 2016. It gets worse. Operating income decreased from three of the company's four mines, including Lucky Friday, in that span. Talk about poor timing.
That said, the company technically had its second best year ever on multiple fronts ranging from revenue to cash flow, a point management repeatedly hammered home on its recent conference call discussing full-year 2017 results. Then again, that's really only because Hecla Mining flipped the switch to production growth in 2016, the company's best year ever. Wall Street is more concerned about the year of lost progress, not comparing 2017 to years in the more distant past. Things could get better in the long term, especially as Hecla Mining ramps up its investment in autonomous mining vehicles, but until there's more certainty surrounding the labor dispute and costs associated with restarting Lucky Friday, investors should avoid this gold stock.
The same can be said of Tahoe Resources, which has been reeling from the loss of its Escobal mine in Guatemala. Well, it's not lost, per se, but a non-governmental organization has focused enough angry energy at the subsidiary that operates the mine to effectively shut it down for the time being. It's been an ugly dispute -- and one that has been weighed on by the country's Supreme Court and Constitutional Court, and even the State Department of the United States.
Escobal contributed most of the company's silver production, so it's no surprise output fell off a cliff in 2017 compared to the previous year. The good news is that Tahoe Resources boosted gold output across its portfolio by nearly 16% last year. That allowed the business to keep its head above water and post net income of $81.8 million for the year, although it marked a 31% drop from 2016.
While Tahoe Resources expects gold production to climb another 12% by 2019 after starting-up new projects in Canada and Peru in the second half of 2018, the uncertainty surrounding Escobal should not be taken lightly by investors. Management believes that legal precedent works in the company's favor, which may be true, but there are quite a few ways the situation can play out, including the potential for costly concessions just to get the mine back online. Long story short, I wouldn't bet on this gold stock as a turnaround candidate just yet.
1 gold stock you can buy
In stark contrast to the headaches spawned by Hecla Mining and Tahoe Resources in 2017, shares of gold streaming specialist Royal Gold gifted shareholders with a nearly 31% gain last year with dividends included. That's the beauty of streaming companies: they don't manage or operate mines and therefore largely avoid the risks inherent to mining companies. Instead, streaming companies provide financing in exchange for the right to purchase a certain amount of production from mining assets, usually at highly discounted prices, and sell their bounties for significant profits.
Aside from a one-time $26.4 million expense related to the new tax laws in the United States, Royal Gold turned in a solid fiscal second-quarter 2018, its most recent three-month period. It turned an astonishing 67% of revenue into operating cash flow, reduced debt by $50 million on an already healthy balance sheet, and increased its dividend for the 17th consecutive year.
Shareholders still have a lot to look forward to for the final half of the fiscal year. Royal Gold is on the cusp of more than doubling its silver stream thanks to the recent start-up of the Rainy River mine in Canada. Its presence will be felt as operations ramp up in the next several quarters. The company is also awaiting a higher stream rate at two mines, initial production from the Cortez Crossroads expansion project, and the start-up of a life-extension project at yet another mine.
So although this gold stock was carried by record revenue, net income, and operating cash flow in fiscal 2017, it seems that fiscal 2018 could prove to be its best year yet. That's why I'd consider buying the stock.