Here’s the lead-in to the new Stansberry & Associates pitch:
“How I Got My Multi-Millionaire Grandmother To Finally ‘Spill The Beans’ On Her BIG Retirement Secret
“She went from making $17 a week… to completely retired, practically overnight. She hasn’t worked a day in over 53 years and will NEVER outlive her money.
“She’s never revealed exactly how she did it… until now.”
The ad is trying to hook subscribers for Frank Curzio’s Small Stock Specialist, and I must admit that I ignored it for a few days because I assumed it was going to be another of the dividend reinvestment/compounding spiels that this publisher has flung our way for years … but those ads have mostly been for the 12% Letter, and this one is, in fact, a little different.
I’m sure compounding is a part of the returns of the copywriter’s multi-millionaire grandma, but the spiel is really about royalties.
And as you probably know, I find it hard to resist royalties. It’s the lazy man inside me, I love the idea of making an initial discovery, investment or creation and getting an ongoing (even if small) income paid regularly, over and over and over for years and years, for that one piece of work. It’s almost enough to make me want to write a book. If I weren’t so lazy.
But are there any royalty companies we haven’t considered? The tease mentions the many royalty-type investments that have done very well over the years, and the hints about past performers imply that there’s a broad business in royalties on pharmaceuticals, pizza, hamburgers, oil and lots of other products …
… but although there are a few royalty/trademark owning businesses in fast food in Canada (Boston Pizza and A&W, for example), and plenty of drug companies who earn royalties on products they developed, among a smattering of esoteric royalty investments … for the most part the kinds of royalty-aggregating businesses that passively compound earnings without being active producers or developers and/or become big dividend payers are in natural resources.
Oil and gas royalty companies tend to be trusts in the US, and these are the best-known royalties on the market, along with a handful of base metal and coal royalties that have been available over the years. They usually own a fixed land or well share position and generate ongoing income based on what the operator sells from those assets — and they tend also to be relatively high-yielding, with most of the value to investors being in the dividends you receive, and, if they’re a trust, they don’t usually have any real employees or actively develop anything, and they’re not allowed to reinvest in new mineral properties.
With these kinds of assets, it’s especially important to keep an eye on the end of the trust or the depletion of the assets — once an asset is depleted or a trust dissolved, the shares become worthless. Usually that happens gradually over a long period of time, and often the life of an oil field can be extended with new technologies over time, but every once in a while we get to the point where investors are still being hooked in by big current dividends and too many folks remain ignorant of the impending end of a dividend stream (as with the Whiting Trust, WHX, or Great Northern Iron Ore, GNI, both of which look initially appealing based on the high current yield but should cease to exist within about two years).
But I’m getting a bit off-topic here already — it doesn’t look like this pitch, which happens to be signed by Scott Louis, a Stansberry researcher, is specifically about an energy trust… nor do they specifically talk about which of the royalties made this Grandma rich over the years, though they give a few examples of big historical winners. It looks like he’s delving into the area that has been catnip for newsletter promoters in recent years: gold royalties.
Which means we probably know what the stock is — there just aren’t that many gold royalty companies, after all — but let’s dig in and check out the clues so we can make sure.
Here’s his take on the big picture:
“If I asked you what type of business is practically guaranteed to go up in value over the next decade, what would you say?
“Well, for my money, there’s simply no question about it.
“With nearly every government in the world printing absurd amounts of money, I honestly believe that the only asset that is practically certain to be worth much more in 10 years than it is today is the most reliable form of money in the world… and that’s gold.
“Of course, there is no question that gold is one of the most valuable assets you can own right now.
“It’s one of the only assets in the world that has gone up for 12 straight years… through the internet bust… the mortgage crisis… the debt ceiling disaster… etc.
“The price of the popular yellowy metal has gone up as much as 540% since 2000, and many experts I work with are predicting it will go much, much higher.
“This makes owning gold bullion a great, great investment for the long term. And I highly recommend you buy some bullion if you haven’t already.
“But here’s the thing…
“Most people have no idea that there is also a way to own lucrative gold royalty interests… which are listed and traded on the U.S. stock market.
“With this arrangement, your only investment is in a company that holds the right to a percentage of the income of the valuable asset. In this case, the gold mine or field.
“This way, you avoid all the risks and expenses of the mining business… and simply profit from the royalties every time one of these operations sells an ounce of gold.”
So that’s nothing shocking — gold has quite clearly been in a sustained dip this year, with lots of hand-wringing about whether it will go to $1,300 or $2,000 next … and it does not, of course, have much real economic value. It doesn’t produce anything, or generate earnings, or feed people. But the very long history of gold as a medium of exchange and a store of value makes me want to keep a portion of my savings in gold as some small defense against depreciating currencies, even if I very much hope that productive businesses will continue to be much better investments than precious metals.
And Gumshoe readers will have certainly heard plenty about the larger gold royalty companies — but which one is Frank Curzio recommending today as a good buy?
We do get a few clues, naturally:
“One of these businesses, for example, collects royalties from some of the biggest and richest gold mines on the planet. One of these properties is located in an area geologists call, “a seemingly bottomless pit of gold.” This mine has paid out more than $198 MILLION in royalties since 2001 and is expected to pay out another $200 MILLION over the next decade.
“In just the past five years royalty revenues are up over 296% — and is expected to go much, much higher. As a result, their share price has been up over 169% during that time with plenty of room to grow. They even pay out a small portion of profits to shareholders in the form of dividends.
“And get this: this little-known stock was one of the only investments in the world that WENT UP in 2008. While most stocks, bonds, and mutual funds took a nosedive during the 2008 financial collapse, this investment returned a whopping 55%.”
Well, I get 280% for the actual revenue growth over the last five reported years, but that’s close enough — and that one is almost certainly Royal Gold (RGLD), probably the most familiar of the precious metals royalty stocks among US investors (though it’s not the biggest — both Franco-Nevada (FNV) and Silver Wheaton (SLW) are significantly larger).
We’ve covered Royal Gold many times, it’s been a favorite of the newsletter world throughout the last five years or so of gold’s rise, and it’s a great company with some amazing assets and, not coincidentally, a nice story that’s easy for copywriters to tell. Analysts are projecting them to grow earnings 10% a year over the next five years, which makes their forward PE ratio of 25 look a little bit on the high side — but as long as gold stays in a range near current prices or drifts higher I expect those growth numbers will turn out to be very conservative.
RGLD has several major, major royalties starting construction or production or increasing production right now, including four of their five “cornerstone” properties, which means their attributable ounces ought to come close to doubling over the next two or three years. With the leverage of low operating costs and no additional cash commitment for those ounces (though some of them are streaming deals, meaning they buy the gold at a fixed low price instead of just receiving a net percentage payment), I think that should probably result in earnings growth that’s substantially better than 10% a year. I don’t own Royal Gold, but I do like it and while there are certainly risks — including falling gold prices, or the fact that a large portion of their cash flow comes from their five largest royalties, giving some concentration risk — it would be an easy stock to buy at these prices for gold exposure after moving down almost in lockstep with the gold miners over the last six months. I’d certainly buy Royal Gold before I bought a major gold miner, though most of the major miners are dirt cheap.
The biggest comparable for Royal Gold is Franco-Nevada, which despite the names is actually slightly more levered to precious metals than is Royal Gold (RGLD has about 25% of cash from non-precious metals, largely because of their royalty on the Voisey’s Bay Nickel mine in Labrador, FNV is about 90% precious metals, including platinum group metals, and 10% oil and gas). Both are priced at about 25X next year’s estimated earnings, and my guess is that RGLD will show revenue growth that’s a little bit better but that Franco-Nevada may have a more diversified and land-backed asset base that provides somewhat more stability … though FNV has also made some expensive and perhaps riskier bets recently, including a possible billion-dollar commitment to the new Cobre Panama project being built by Inmet.
Those differences are splitting hairs, really — if you think gold is going up or staying close to this price, they’ll both make buckets of money and see substantial earnings growth. And over the past six months of weakening gold prices, they’re both down about the same amount.
Gold itself has fallen a bit more than 10% in the last six months, the royalty stocks and the big gold miners, on average, are down between 25-35%, so the royalty stocks have recently suffered as much as the miners — until the last six months, the royalty stocks had performed far, far better than the miners, so this is a bit of a worrying development for those who have preferred royalties because of their resilience, and because they just have a much better business model and track record for treating investor capital carefully than do the actual miners. My guess is that if gold recovers the royalty stocks will again do substantially better than the average miner, but right now they’re all in a funk.
I don’t own either RGLD or FNV, nor do I own Silver Wheaton (SLW), which is the only one of the streaming/royalty companies that looks genuinely cheap (and has been cheap for years now) based on current earnings. All three have low-cost structures, little operational risk other than tax changes or the expropriation of the mines on which they own royalties (all have most of their assets in “safe” jurisdictions like Canada, the US, Mexico and Chile, so not a major current concern), and all pay tepid but growing dividends (ranging from 1-2%).
My favorite passive gold investment is Sandstorm Gold (SAND), in part because they’re smaller and I think they have more growth potential, but that stock is also down substantially over the last six months, roughly in line with RGLD and FNV, and you’re probably sick of hearing about these streamers/royalty stocks anyway … if I didn’t own any of these stocks today I’d probably want to nibble at a few of them to be a bit more diversified. They’re all getting clobbered as I type this, with gold down 1% and the royalty companies all down by something like 6%, so right now we’re experiencing the negative swing of leverage — being levered to gold prices hurts when the prices fall, just as it helps, or so the plan goes, when prices rise.
So let’s move on and see what the second pick is for this “Rich Grandmother” tease. Clues, please!
“In Frank’s research report, ‘The Two Best Royalty Businesses on the Planet,’ he’ll also outline a rare opportunity to get in early on what could easily become the next royalty giant.
“This small outfit collects royalties from gold, silver, iron ore, copper, cobalt, and uranium. They also control one of the biggest nickel mines in the world, yet practically no one in the investment community is paying attention to this small stock.
“This company is so small they only have 15 employees… but have managed to partner up with the biggest names in mining: like Cameco, Barrick, Xstrata, Sprott Resources, Cliffs, Rio Tinto, BHP Billiton, Teck Resources, and Fronteer.
“These partnerships allow them to collect royalties from some of the biggest nickel, gold, uranium, and iron mines in the world. Last year alone, they increased sales 97.3% to over $11 million and they carry ZERO debt.
“But they just locked in what should be their biggest royalty project yet. When this new mine starts producing, royalties are set to increase over 500% – to just shy of 60 million per year.”
Ah, now that rings a wee bit of a bell … and the Mighty, Mighty Thinkolator sez we’re looking at a tease here for an old favorite, Altius Minerals (ALS in Toronto, ATUSF on the pink sheets). I’ve owned this for years, after first learning about it when researching a teaser for Extreme Value (another Stansberry letter).
Back then, Altius Minerals was recovering from a failed refinery building project and had a nice base of assets in the maritime provinces of Canada … and today, that’s more or less still the case, though they’ve managed to turn more of their exploration assets and expertise into cash-generating deals and partnerships and spinouts to create both some current value and a few possible big wins in the future.
The royalty that Curzio is teasing as their “biggest royalty project yet” would also be only really their second royalty to earn anything substantial — they do have a bunch of royalties on the books for projects in gold, uranium, cobalt, silver, etc…. but none of them are developed mines or producing royalties, they’re all “future potential.”
And they don’t “control one of the biggest nickel mines in the world” … but they do have a small royalty on one of the biggest nickel mines in the world. That’s Voisey’s Bay, the same mine that’s generate one of the cornerstone royalties for Royal Gold — and there’s a closer connection there, because that larger Voisey’s Bay royalty was also the major asset owned by International Royalty Corp back when it was subject to a takeover war between Royal Gold and Franco Nevada a couple years ago, and Altius owned a nice chunk of International Royalty so they reaped a good cash windfall from that eventual RGLD takeover.
The Voisey’s Bay royalty is the only one currently producing for Altius, and it’s been a huge winner for them, but it doesn’t quite cover the operating expenses of the company. The next big royalty, assuming the mine is developed as planned, will be from Altius’ own exploration. Altius is the major owner of exploration licenses in the Labrador Trough, one of the world’s great iron ore provinces, and they used one of the discoveries in that area to create a spun-out company called Alderon (AXX, ADV in Toronto), which then raised money (Altius still owns a large chunk of AXX, but is no longer the majority shareholder) and is pushing through to development of what is usually called the Kami Mine.
Alderon is now bumping along near their all-time low stock price, so the Altius equity position has been losing value due to both dilution and falling share prices, but the real asset that Altius cares most about is not the equity in Alderon, it’s the huge 3% gross sales royalty on the mine that they will continue to hold (they’ll probably sell their remaining equity stake at some point). If the mine is built as planned, which would mean construction starting next winter and commercial production commencing about two years after that, then Altius will be at the start of receiving royalty payments for at least 20-30 years. If iron ore prices stay in the range of their estimates or go higher, that would mean royalties of at least $20-25 million a year at the initial production rate, and possibly twice that if the mine is expanded. At that point, Altius has said they intend to become a significant dividend payer — but until then, they’re sitting on huge amounts of cash and a dozen or so other exploratory projects and potential royalties, and may well invest in more advanced royalty projects if they can find any.
I’ve written plenty more about Altius, and bought some more earlier this year, but though there is real long-term value in these shares, and they do have a big cash cushion and a lot of potential irons in the fire for future development that would make me patient with the stock even if Alderon continues to be weak, the real leverage to the company over the near term will be iron ore prices. If you think Chinese demand collapses and iron falls back below $80 a ton, Altius probably isn’t going anywhere soon. If you think iron prices will remain relatively high, perhaps fluctuating between $80-120 on the low side, then the Alderon mine should continue apace (they’ve already got a lot of funding, and a large funding commitment from their Chinese partner), and Alderon shares should recover, keeping Altius shareholders happy. The Chinese import price for iron ore, which is apparently what most people watch, has fluctuated between $100-150 over the past year and recent forecasts have been quite negative, hurting most of the iron ore producers.
So there you have it — Curzio’s touting Altius and Royal Gold as the “Two Best Royalty Businesses on the Planet” … what do you think?
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