In a recent Motley Fool article, the author refers to the main advantages of investing in streaming and royalty companies such as Silver Wheaton (NYSE:SLW), Royal Gold (NASDAQ:RGLD), and Franco-Nevada (NYSE:FNV) as opposed to gold producers such as Barrick Gold or precious metals ETFs such as SPDR Gold. Basically, streaming and royalty companies have high profit margins and less operational risk than gold and silver producers. They also offer dividend payments, while precious metals ETFs take a management fee. In this article, I'll examine the main differences among Silver Wheaton, Royal Gold, and Franco-Nevada. Specifically, let's examine these companies' projected growth in 2014, financial risk, and metals mix.
Expected growth in operations
One of the main differences among these three companies is the expected growth in their operations. In 2014, Silver Wheaton expects to increase its volume of silver equivalent ounces produced by only 0.5%. Most of this growth will come from its gold operations.
This year, Franco-Nevada plans to increase its production by 5.5% year over year. This is another factor that will push its stock higher. Moreover, the company has the means to reach an even higher growth rate, with more than $770 million in cash, and an unused $500 million credit line.
On the other hand, Royal Gold isn't likely to augment its production this year, mainly because its gold producers are expected to mine lower-grade metals. Because of this development, in the last quarter of 2013, the company's production volume declined by 31% year over year. Nonetheless, Royal Gold expects an increase in its Penasquito production, which could offset some of the negative impact the shift toward lower-grade metals will have on total production.
Therefore, those seeking a more rapidly growing company would be better off choosing Franco-Nevada; Silver Wheaton and Royal Gold offer little potential growth in volume anytime soon.
The financial risk
Another issue to consider is the level of financial risk that each company incorporates. As of the last quarter of 2013, Silver Wheaton's debt-to-equity ratio was the highest of the three at 0.3. Conversely, Franco-Nevada's ratio is the lowest, at 0.03. This means that the burden of debt Franco-Nevada holds is the lowest of the three; in other words, the company holds the least financial risk from its balance sheet point of view. Another measure worth noting in this respect is the quick ratio, which is a crude measure of a company's ability to cover its short-term liabilities in case of need. Because this measure doesn't consider a company's working capital, it should be taken with a grain of salt.
The table below summarizes the main measures for these companies' debt burdens, and level of liquidity.
As you can see, Silver Wheaton's quick ratio is the lowest, at 4.7, while Royal Gold is the highest, at 29. This result suggests that Silver Wheaton's risk of reaching a liquidity problem is higher than the other two companies. Another major difference these companies have is the mixture of the commodities they sell.
Finding the right mix
All three companies heavily rely on precious metals, but Silver Wheaton's main metal is silver (no surprise there). In 2014, the company expects its silver operations will account for 74% of its total operations. The rest is gold. Back in 2012, this ratio was 91% for silver, and 9% for gold. The shift came soon after the company acquired the Sudbury and Salobo mines back in early 2013.
Royal Gold also sells gold and silver, but its main metal is gold. Back in 2013, gold accounted for roughly 80% of the total precious metals produced. The rest was silver.
For Franco-Nevada, gold accounted for 68% of its total revenue during 2013. The company also sells other metals including palladium and platinum, which accounted for roughly 13% of its total sales last year. Finally, 17% of its total revenue came from oil and gas sales. Therefore, investors, who seek to expand their portfolios with a wider array of metals would be better off considering Franco-Nevada.
Choosing among the above-mentioned streaming and royalty companies isn't an easy task, and it mainly depends on the level of risk you are willing to take, the mix of commodities you prefer, and the importance you place on growth. These companies have other differences, such as the type of contracts, currency risk, and more. But this analysis should provide you with some clarity regarding the main characteristics these companies have.