Shares of Royal Gold Inc. (RGLD 3.71%) aren't just doing relatively well so far this year, they are easily beating other precious-metals options and the broader market, too. The outperformance makes sense, given the gold-streaming and royalty company's strong operating performance so far in 2018. But is it still worth buying after this relatively strong stock run?
The numbers look good
Royal Gold's stock is up around 11% so far in 2018. The S&P is up around 4%, and iShares Gold Trust, which tracks the price of gold, is down around 3%. The company's closest streaming peers, meanwhile, are also lagging behind Royal Gold's year-to-date return, with Wheaton Precious Metals (NYSE: WPM) up just 1% and Franco-Nevada (FNV 3.23%) down 8%. When you look at these numbers, Royal Gold's performance stands out.
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There's a lot of good news to back that strong stock price performance. For example, Royal Gold's gold equivalent ounce (GEO) production in fiscal 2018 has been in line or slightly higher each quarter compared to fiscal 2017. Realized prices, meanwhile, have been higher in two quarters and lower in two quarters, which will likely net out to roughly flat to slightly higher for the full fiscal year, which ended in June. The end result of strong production and flat to higher realized gold prices should mean another solid year of results for Royal Gold.
At a recent conference, management described fiscal 2018 as "steady performance with another step up in cash flows." Looking at the trailing 12 months through the third quarter, Royal Gold's cash flow was up 11% (excluding the positive impact of tax law changes) compared to full-year fiscal 2017 cash flow. Noting that the fourth quarter witnessed solid production, though slightly lower realized prices, it's fair to expect that full-year 2018 cash flows will hit a record in fiscal 2018. The dividend, meanwhile, was raised again early in the calendar year, bringing the company's streak of annual dividend increases up to 17 consecutive years.
Royal Gold looks like it's having a good year, and the stock advance is simply a reflection of that performance.
What about the future?
That's the past, however. The bigger question is whether or not Royal Gold's future remains strong enough to justify the current stock price. A recent update suggests the answer is yes.
On the negative side, the Mount Milligan mine in British Columbia experienced a temporary shutdown that will likely lead to lower production in early fiscal 2019. However, Royal Gold expects those delayed shipments to be made up in the future. In other words, this issue is likely to be a wash over the long term.
On the positive side, Royal Gold has seen increasing production at several other key mine assets, including Wassa & Prestea in Ghana and Rainy River in Ontario. And it still has a number of growth projects in its portfolio that should support long-term production growth as well. These include expansion plans at Wassa & Prestea, Rainy River, Cortez Crossroads in Nevada, and Penasquito in Mexico. Each of these mines has unique individual stories, but the key overall story for Royal Gold is a positive one for production.
Meanwhile, Royal Gold has been using its strong cash flow generation this year to prepare for the future. Notably, that's included paying down its revolving credit facility. The $1 billion facility was fully paid off in the fiscal fourth quarter. That gives it plenty of leeway to invest in any new streaming deals that come up.
RGLD price-to-tangible-book-value data by YCharts.
Valuation wise, Royal Gold's price to tangible book value is trading roughly in line with that of Franco-Nevada, its closest peer, but above Wheaton. However, Wheaton has far more exposure to silver than Royal Gold or Franco-Nevada. Silver hasn't been performing as well as gold in recent years, so the discount there makes sense. All in, Royal Gold's valuation appears reasonable at this point.
Still a good option for gold investors
Royal Gold's stock price has done quite well this year, with solid operating performance helping to explain investor enthusiasm. It also has solid prospects for the future, with mine projects advancing well and debt reduction preparing the streaming company to take advantage of future opportunities. Despite the stock's outperformance so far in calendar year 2018, it looks like Royal Gold remains a decent option for most investors looking to add some gold exposure to their portfolios.
