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“Much of the gold mining industry is underwater and can’t make money with these prices. We’ve seen capital programs being significantly cut back in terms of companies looking to expand and build new mines.”
That’s according to Ralph Aldis portfolio manager of our Gold and Precious Metals Fund (USERX)and World Precious Minerals Fund (UNWPX)who was interviewed recently for the latest edition of our Shareholder Report.
He continues:
“Those companies have been sufficiently scared enough that even when gold prices do recover they’re going to hold off on expansions because they might have lost the appetite to risk capital on new projects.”
This is where royalty companies come in.
As a refresher royalty companies basically serve as specialized financiers that help fund cash-strapped miners’ exploration and production projects. In return they receive either royalties on whatever the mine produces or what’s known as a “stream” which is a commitment to an agreed-upon number of ounces of gold or other precious metal per year.
From an investors’ point of view royalty companies just have a superior business model. I’ve discussed this on numerous occasions most recently during this week’s Gold Game Film which we shot in Fort Lauderdale following the 2015 Gold Stock Analyst Investor Day.
Attractive Risk/Reward Profile
There are several reasons why Ralph and I find these companies so attractive.
For one they’ve typically remained well-diversified. Whereas any given mining company might own only one or two mines—which may or may not be operational—royalty companies can stay profitable by receiving regular streams of revenue from multiple sources. Toronto-based the world’s largest precious metals streaming company has secured the right to purchase silver at a very low fixed cost from 18 operating mines in North and South America and Europe.
Another reason why these companies have outperformed is because simply put they’re not the ones getting their hands dirty. Their only obligation is to lend capital. They don’t build the mine’s infrastructure; they’re not responsible for cost overruns or maintenance; they don’t experience capital cost inflation; and they don’t have dozens of miners and other personnel on their payrolls. Royalty companies therefore enjoy many of the upsides of being in the precious metals industry but face very few if any of the risks.
To elaborate on one of the points already made these companies have extremely low overhead compared to miners. is run by 30 people at most and yet it generates around $500 million in revenue. On average that’s $16 million per employee! It’s very possibly the world’s most profitable company on a revenue-per-employee basis.
Other royalty companies that have been good to our precious metals funds are and . Both have huge cash flow wide profit margins and pay dividends. Since went public in December 2007 it’s torn past both spot gold and most gold equity benchmarks.
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As of now royalty companies make up about 13 percent of USERX and 12 percent of UNWPX.
Diversify and Rebalance
As always I recommend a 10-percent weighting in gold: 5 percent in gold jewelry or bullion the other 5 percent in gold mining stocks. Remember to rebalance once a year.
“You might also get some additional benefits by rebalancing quarterly” Ralph says. “That’s like playing chess with the market as opposed to rolling craps.”
In the meantime look for the Shareholder Report arriving soon in mailboxes all across the nation! Inside you’ll find articles not just on gold but also topics ranging from growth in India and Turkey to our Near-Term Tax Free Fund (NEARX) which has delivered 20 straight years of positive returns.
NEARX in fact is the focus of our next webcast to take place next Wednesday March 4. We hope you’ll join us!
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Please consider carefully a fund’s investment objectives risks charges and expenses. For this and other important information obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage Inc.
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