“Nevada’s Filthy Rich Royalties”

By Travis Johnson, Stock Gumshoe, February 5, 2008

Kind of seems like the folks at Stansberry are testing to see whether the term “Filthy Rich” works well in their email campaigns, this is the second one I’ve seen of late (the other was for “My British Uncle Albert’s Filthy Rich Retirement Secret…”).

But that’s neither here nor there. We apparently have an opportunity to reap untold millions here — let’s investigate!

This is from the S&A Oil Report, by Matt Badiali (we’ve seen a lot of him lately, too, thanks to the L-2 Indicator and the return of the Colorado Secret Oil Shale emails). A subscription will get you all kinds of info about this Nevada gold royalty investment, I’m sure, but perhaps reading on a bit further and indulging your favorite Gumshoe will get you started on your own … gratis, of course.

The letter includes the usual quotes from reputable news sources to let you know that this is not a scam to sell you the Brooklyn Bridge — in this instance … “I did manage to dig up a survey from The Washington Post, which reports, ‘No [opportunity of its kind] in the United States promises more future riches….’ ”

There’s plenty more info about royalty companies, and why royalties exist and can be bought — essentially, the way I see it, royalty companies largely exist to let big gold mine operators hedge. They sell those royalty rights to monetize some of their future earnings immediately and help pay some of the often gargantuan start up costs for the mines. I don’t really know if that’s the rationale behind all

In case that’s not enough to convince you (smart you!), let’s continue.

You’re probably aware that Nevada is one of hotspots for gold mining in the US, and has been for many years. Apparently, there’s something about the state aside from all the gold in the ground, that gets people excited:

In Badiali’s words, “You see, the practice of allowing ordinary investors to own royalty stakes in lucrative mines dates back more than 150 years in Nevada. Back then, individual investors could buy royalty stakes in gold and silver-filled land. They received royalties as the precious metals were produced. It was probably the safest and easiest way in America to get rich at the time….”

There’s an interesting little history lesson built into the letter about the changes to the mining industry and, apparently, to Nevada law:

“As big mining companies took over the industry, the practice of extending royalties to ordinary citizens ended. For most of the last 50 years, the only practical way to make money on lucrative mines has been to buy mining company stocks. These are the companies that explore for, or produce, gold, silver, or other precious metals.

“But the good news for investors like you and me is that all changed in 1990, when Stanley Dempsey – a clever geologist and lawyer from Nevada – uncovered a unique opportunity that makes it possible for Americans like you and me to again collect huge mining royalties, without taking big risks associated with ordinary mining stocks.

“What most people don’t know is that Dempsey personally found a way to get these shares listed and publicly traded on the New York Stock Exchange. So you can buy and sell them – just like any regular stock.”

OK, so we’re dealing with Nevada mining royalty companies — companies that essentially invest in various mines and therefore collect a small percentage either of the ore that comes out or of the resulting income. That’s the good news.

The bad news is, there are quite a few of these companies. The Goldstrike mine is mentioned, and that’s in fact where the Washington Post quote came from, too, from an article that was written back in the mid-90s about the ridiculous giveaway that some of the mining finds on federal land represented (according to that article, Barrick essentially bought the mining rights to the land, which holds a multi-Billion-dollar pile of gold, for less than $10,000). That law, by the way, is under fairly steady debate in Congress and, if Nevada Senator Harry Reid can be bypassed, would likely change at some point and mean that U.S. miners would have to pay a royalty when mining on federal land, which might potentially cut the value of some of these royalty owners in the future. Maybe.

So, can we figure out which specific companies are being discussed here?

Not many clues are given, I’m afraid — Badiali describes two possible investments, but very briefly:

For example, this report details one of my favorite royalty mines right now – a mine located in an area geologists call, “a seemingly bottomless pit of gold.” This mine has paid out more than $102 MILLION in royalties since 2001. Don’t worry… I expect they’ll pay out another $100 MILLION over the next few years. It’s the perfect time to get in on this windfall.

So what can the Gumshoe tell you about that? Well, the “seemingly bottomless pit of gold” is the Carlin Trend in Nevada, which is an incredibly rich trove of “microscopic gold” — gold that you couldn’t find with as shovel but can extract with technology, so it has seen increased mining as technology has improved in the past 30 years. It’s apparently the Carlin Trend that has launched Nevada into the top tier of gold mining sites in the world.

But there are lots of companies plying the Carlin Trend. Arg.

I’ll also tell you about one of the biggest gold discoveries in recent years. This promising young gold mine goes online in late 2008 and is estimated to pay royalties for the next 17 years!

So, with that being the sum total of the specific clues, I can’t tell you exactly which of the royalty companies this is.

I can, however, venture some guesses and offer a couple suggestions for further research.

My guess is that the favorite mine that has paid out over $100 million in royalties might well be the Goldstrike mine, the centerpiece of Barrick Gold’s work in Nevada and one of the largest gold mines in the world. It also encompasses a fair number of old mining claims and royalty owners, but one promising owner of royalties to part of the mine is Royal Gold (RGLD). Royal Gold could also, as a wild guess, fit the second mine’s clue, because one of their royalty positions is with the Penasquito mine in Mexico that is one of the larger recent gold discoveries. It’s not in Nevada, of course, but I’m not sure I understand why the “Nevada” part is particularly important — big royalty firms like Royal Gold have pieces of mines all around the world, it’s not as though the idea of owning a royalty stream for a gold mine is at all unique to Nevada.

This is probably not really the stock Badiali is teasing here — if he visited Nevada, there’s a significant likelihood that he was interested in the smaller royalty owners, and Royal Gold is one of the bigger ones, and not one that pays a significant dividend as is teased in the ad.

If you want to look into royalty companies a little more, the ones I hear most about are International Royalty Corporation (ROY) — Seeking Alpha article here; the aforementioned Royal Gold (RGLD), and Franco-Nevada (FNV in Toronto, don’t know of a pink sheet symbol yet) which just went public (again) after being owned by Newmont for many years.

Personally, I would hesitate to get involved in royalty companies that focus on one or two mines or that are very small. In this sector, my personal preference would be to stay away from the small caps and diversify — so with silver, for example, I’d probably go with Silver Wheaton (a similar big pure play royalty company), and for gold I’d probably go with Royal Gold or Franco-Nevada, which is a recent spinoff of Newmont’s royalty interests around the world (a large part of their portfolio came, in turn, from acquisitions of companies like Battle Mountain). This business is sort of like the mineral equivalent of being a venture capital investor, and for me the idea of having a big portfolio of diverse mining royalty assets is appealing.

Franco-Nevada, by the way, also has a much bigger piece of Goldstrike royalties than does Royal Gold, so if it’s that big mine you like then maybe Franco-Nevada’s your guy. Royal Gold bills itself as the largest “pure play” in this business, but Franco-Nevada might really deserve the crown more (still arguable, because Franco-Nevada has non-precious metal assets too, including oil and gas royalties). Both companies are right around a billion dollars in market cap. International Royalty is quite a bit smaller, and there are some smaller players like Allied Nevada (ANV), which just went public last year.

So … no get-rich-quick ideas for you today, but if you feel like proposing a different royalty owner who might be worth consideration I’m sure we’d all be interested to hear about it. I’d look at Royal Gold and Franco-Nevada before considering a small royalty company, but that’s just me.

And frankly, I’d probably go with the gold ETF for exposure to the yellow stuff before considering either of those … sometimes simplicity is your best friend. Royalty companies are built to perform well in boom times and have some cushion in bad times, but this probably isn’t the best place to look if you’re hoping for a stock that will quintuple in value on the back of a sexy new discovery.

I hope we can all become gazillionaires with some non-mineral stocks soon, these mining companies give me a headache.

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32 Comments on "“Nevada’s Filthy Rich Royalties”"

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G IMBURG
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G IMBURG
February 5, 2008 11:31 am

MY STRATEGY TO TRY TO PARTICIPATE IN THE GOLD FRENZY IS TO SELECT A GOLD MINE WITH GOOD RESERVES,CHEAP PRODUCTION COSTS,AND JUST ON THE VERGE OF GOING INTO FULL PRODUCTION. THIS WAY YOUR PROBABLY GETTING IN ON THE BOTTOM FLOOR,AND HAVE TWO VARIABLES WORKING, THE PREDICTED PRICE INCREASE IN GOLD,AND ACCELERATING EPS. ONLY TIME WILL TELL IF THE STRATEGY WORKS.

DAH
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DAH
February 5, 2008 12:27 pm

I’m kind of going with the same idea as G IMBURG, MNEAF was my choice, mining down in S. America. They just went in to production last summer, and hopefully someday soon we will hear some news on them. The stock isn’t doing much right now though, but it is one of those penny stocks that a person can afford to get in to.

Stan
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Stan
February 5, 2008 2:17 pm

I can tell you for certain the first 2 you snooped out are the ones he is pumping. I have a friend who subscribes and told me of these few weeks back.

Jon
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Jon
February 5, 2008 4:04 pm

After reading many of your daily observations about the money managers who “tease” certain stocks the obvious question that comes to mind is Stansberry and their ilk paid by these company’s to promote their stocks or are they legitimately looking for values for their subscribers and the “teaser” just a form of promotion to acquire more subscribers?

G IMBURG
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G IMBURG
February 5, 2008 7:54 pm
Porter Stansberry writes a controversial daily thats filled with invitations to give opinions both good and bad. If you read my recent post,you will see my opposition and the reason why is I sense they are so taken with themselves they cant lose. His bragging on their track record is no guarantee of future success,and their recent track record stinks. I am willing to pay for ideas which I do, but dont jump off the cliff. A stock doesnt go up because they say so. Few give any disclosure of the downside risk. I doubt that they are paid to… Read more »
MLJ
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MLJ
February 5, 2008 11:40 pm
Just an observation: having worked in the northern Nevada “Gold Rush” area for some time and witnessing the management styles of the “mega miners” Barrick and Newmont, and comparing with some of the other operations such as Gold Corp and Kinross, my last choice for an investment would be Newmont. Barrick is miles ahead in it’s mentality but I put my money into Gold Corp. Not only does it have a decent management philosophy, it is progressive in it’s approach to one of the major stumbling blocks for mines today, OTR tire management. Kinross and Barrick are also progressive in… Read more »
Gravity Switch
Admin
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February 6, 2008 10:32 am

Thanks MLJ, always interesting to hear from someone with an inside perspective.

Diana C
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Diana C
February 7, 2008 4:52 pm

I read with interest about the gold mining companies. There is one I heard of a few years ago–Goldspring. Do you know anything about them?
I like your writing style, and your diligence in research. Thanks.

lgj
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lgj
February 8, 2008 12:09 pm
Thanks for the confirmation of GOLDCORP as one of your top miners – I’ve been trying to determine whether to add to my GG position (I already own shares and they’ve excelled). I wasn’t aware of the OTR tire issue, but I’m glad to hear they’re on top of it. So it’s the question of diversifying amongst the players or adding to my GG position, oh the dilemmas! Recent research of GG indicates that projected production is increasing this year, & cash costs are estimated at $250/oz for 2008 (up from 2007 costs), but still significantly lower than Barricks 2007… Read more »
Jack Kissner
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Jack Kissner
February 8, 2008 7:59 pm

Has anyone looked at Sino Gold, propurted to become the largest gold mining company in the world? Symbol sgx.ax (australian stock exchange) and siogf.pk on the US pink sheets.

PLT
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PLT
February 9, 2008 11:08 am

Anyone done research on COEUR D ALENE CDE?

MLJ
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MLJ
February 9, 2008 2:22 pm
I’m not sure of the answers to some of the questions other than Newmont mining costs per ounce are the highest of any of the “mega” miners in Nevada. I believe Newmont and Barrick have both transitioned to selling their gold on the “spot” market with little or no hedging. I know Newmont did this sometime last summer, I believe it was in June. This may have occurred because one project has costs in the range of $900.00 per ounce and the hedging price was well below where the market was headed. This may be the one thing they did… Read more »
Kona Rick
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Kona Rick
February 10, 2008 12:02 pm
The recent research I’ve been successful with is on Paramount Gold and Silver. They are an exploration company with most of the successful news coming from their Mexican land leases. The risk is different here, as they are explorers and may not turn up good quality strikes, but they also don’t have the expenses of capital equipment for large scale mining. This work is being done in the San Miguel Zone near the Coeur D’Alene Mines Corp.’s project at Palmarejo, which has some success. There is good background in the Ron Struthers November article including good words about GG. http://seekingalpha.com/article/54946-ron-struthers-on-finding-the-next-gold-winners
KnowledgeCartographer
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February 11, 2008 8:23 pm

Sjuggerad made a good call on a rebound in homebuilders – his call was early, but in the last 4-6 some homebuilders have almost doubled. I didn’t read anyone else, anywhere making that call. It was worth a lot.

Shawn
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Shawn
February 12, 2008 4:52 am

Jack,
Sino Gold was touted last year because of some new mines in China. They made a little money as they got listed on the hong kong exchange. However, as I recall the price to gold reserves is pretty high, and they really haven’t moved much during the past year.

Seabridge gold, a horder rather than a miner, holds about half an ounce of gold per share (recently in the mid twenties). It made a nice run last summer, but has recently fallen way off. However, it was originally touted at 3 bucks a share.

DOC Lee
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DOC Lee
February 17, 2008 12:07 pm

How much does it take to get into this whole royalties stock option? I’m no financial wizard, but it looks like it could be pretty good. How does one get this done? Who do I contact?

Gravity Switch
Admin
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February 17, 2008 12:26 pm

Hi, these are all just publicly traded companies – any stoockbroker can buy them for you if you’re really interested.

Stalt
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Stalt
February 18, 2008 1:39 pm

Goldcorp is a great company!
As far as small companies getting into production and starting to make money, look at GPXM. They have a good website with a lot of photos and information.

Lilian
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Lilian
February 18, 2008 1:39 pm

I made my own investigation and got the same results for gold royalties (RGLD – Stanley Dempsey Board of directors, ROY) but I somehow stuck with US oil company that went private in 1988. Any idea? Thanks.

DOC Lee
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DOC Lee
February 18, 2008 1:40 pm

ok and I ask for the royalty stock??

DOC Lee
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DOC Lee
February 18, 2008 1:44 pm
I know these are simple questions and in some cases folks may say “what an idiot”. However, if they were to ask me the best way to prevent food born illness outside of washing hands, or some other question in my expertise, I’m sure I would roll my eyes as well. So, the best question is one asked. I have no experience with investing anything ever. My next question is is there any minimal amount or is that left to the brokers to set? Who do you reccomend for a first time investor? My wife owns several stocks, but I… Read more »
Gravity Switch
Admin
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February 18, 2008 2:15 pm

Doc, I’m not allowed to give you personal advice. If I were to begin investing from 0 today I would start with broad mutual funds or ETFs. All individual stocks, these included, are much riskier than diversified funds.

Online brokers generally let you buy any number of shares you like, but with smaller investments the commission becomes a significant percentage of your investment.

Lilly
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Lilly
February 20, 2008 2:44 pm

Stansberry et al are under indictment by the SEC for fraudulent online investment newsletters.

Mike M
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Mike M
February 22, 2008 10:41 am

Apparently Anglo-Swiss Resources just tapped one of their mines and found potentially $5 billion worth of gold. Speculation of course but the stock is trading at 25 cents a share and will be going up soon after this announcment.

James
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James
March 12, 2008 10:22 am

I’m working a not so great paying job right now. Would it be wise for me to invest $1,000 in Franco Nevada? I realize the risk but how exactly do the returns work? Once you sell, you get the cut of royalties? Most of the things i’ve read sound too good to be true. I need answers.

Gravity Switch
Admin
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March 12, 2008 10:39 am

James, neither I nor the newsletter writers can give you individual advice. I can tell you that royalties are payments that go TO Franco-Nevada from the mine operators, shareholders don’t get royalties directly. Franco-Nevada has announced that they plan to pay a modest dividend of about 1.5% based on the amount of cash flow they get from the royalty-generating investment they’ve made in gold mines and other resource extraction activities.

Tony V
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Tony V
March 21, 2008 5:21 pm
I recently bought the Oil Report for $49 to see if it would compliment several other utility and oil newsletters I receive now. The “Nevada Royalties” report was included and I was intrigued. However the report states having a “program” for these royalties that will make you “rich” but give no clue whatever as to what that “program” is. He touts Royal Gold and International Royalty that pay no dividend. Royal Gold is paying out a quarterly dividend of .26 a quarter. This was in stark contrast to the teaser ad that I saw for a “Mr. Wilkes” who was… Read more »
Rod D
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Rod D
March 22, 2008 3:23 pm

For those interested in monthly income, instead of mining royalties, consider Algonquin Power Income Fund (APF-UN.TO), trades on the Toronto Exchange, available through most U.S. discount brokers, has paid $.92 per year (but paid monthly) dividend since 2001 and has an current annual yield of about 13%. Why like mining – it generates hydroelectric power, wind farm power, burns solid waste to generate power and operates 17 water utilities in the U.S…..all more stable than mining!

Malcolm Thorpe
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Malcolm Thorpe
August 9, 2008 9:37 am

Remember that quote from Mark Twain, “A Gold Mine is just an hole in the ground with a fool on top”.

cash back
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August 18, 2010 10:07 pm

any update on these gold royalty plans? I just got the email today, is this an update?

Gravity Switch
Admin
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August 18, 2010 10:19 pm

The business doesn't change all that fast, though some big mines have come online or upped production in the last year or so and increased the royalty revenue — its till the same small handful of public companies using this business plan, including RGLD.

diana cowley
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diana cowley
September 2, 2010 7:09 pm
i brought 5 shares of royal gold and go 58 for it about 3 times already and i brought 46.00it at 49.00 9-2010 i am limit on my money so i don't know if it could be better or not but gone to 52.00 today back up 49.00 twice now. 58 is either quartly which think it is but if i afford a 100 shares i would sell a call option get money every 30 days within a few seconds. also don't buy using cover call just buy the stock then sell the call because it cost you more the… Read more »
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