Nick Hodge and Gerardo del Real did not disappear for long when their newsletters stopped being published by the Outside Club… they’re back with new letters from a publisher they’re now calling Daily Profit, including Gerardo del Real’s Junior Resource Monthly (currently “on sale” for $99, this is effectively a restart of the Junior Mining Monthly letter he helmed for the Outside Club).
And, naturally, they’re out trolling for new subscribers — that subscription is being peddled with the promise of a new gold royalty stock that pays dividends and is Del Real’s “#1 Gold Stock for 2021.” And I loves me some royalties, and know that many Gumshoe readers are in the same boat, so I thought I’d figure out which one he’s hinting at. So let’s put the Thinkolator through its paces, throw in the clues, and see if we can come up with anything interesting to chew on.
Here’s a bit from the order form, just to get you juiced up…
“Gerardo has the inside scoop on a new gold royalty IPO… and why it’s priming up for 1,000% gains.
“He says it has all the upside of gold miners… while cutting your downside risk substantially.
“It gets paid royalties… including from some of the gold assets now owned by Warren Buffett himself… and then passes a portion of those royalties on to you in the form of cold, hard cash….
“This new IPO is backed by one of the world’s top ten major gold producers.
“Since it’s brand-new, nobody has heard of it. So it’s still cheap.
“Which is why, based on conservative calculations, it only trades at 1/10th its real value.”
Many royalty companies were founded by first spinning off the assets of an operating company — often a miner will own some royalties as a result of old acquisitions or exploration projects and the value of those royalties will be hidden and under-appreciated by investors, or sometimes mining companies will recognize the crazy valuations that royalty companies sometimes trade at and spin out new royalties of their own into a new company to try to “unlock value”.
Del Real seems to be hinting at one of these, a company that was spun out of a larger parent. Here’s more from the ad:
“… previous royalty company IPOs needed to rise 10X to 20X to match the value of their parent company.
“That means you’re looking at both a 10- to 20-bagger return on the stock… PLUS the cash payments that it spits out.
“But only if you get in now, while it’s still cheap.
“Gerardo has been eyeing this opportunity, and getting the inside scoop…
“Now that they’re publicly trading, you can get a piece of this next big gold success story.”
There haven’t been enough of these kinds of transactions to really fairly value them using the former parent as a yardstick, I’d say — better to look at the actual value of the royalties and the cash flow they provide, and figure out whether the company’s valuation is similar to royalty peers… but we’ll get to that in a minute. First we have to get a name, right?
So what other clues are dropped along the way? Here are a few tidbits:
“It even gets to collect a certain percentage of the gold Warren Buffett now owns through his purchase of Barrick shares!”
OK, so there’s somehow a royalty on a Barrick mine somewhere in their portfolio. Buffett surprised everyone by buying into Barrick over the summer, the first mining stock position in the Berkshire Hathaway portfolio in my memory… though it wasn’t a huge position, and Berkshire’s Barrick holdings were reduced within a few months, so it probably wasn’t Uncle Warren himself making the trades (he has a couple former hedge fund guys who each run large chunks of the portfolio, so Buffett’s signature is more often tied to Berkshire’s really big moves — if it’s an investment of less than $5-10 billion, Warren probably didn’t personally make the call).
We can get into royalties more in a minute, if the whole concept is new to you, but it’s basically a financing structure — investors buy a small portion of the future output of a mine for a set up-front fee. Royalty companies acquire portfolios of royalties on mines that are either in production now, generating cash flow, or possibly valuable in some future when those properties might get developed (closer to production or cash flowing royalties are, of course, much more expensive), and there are a dozen or so precious metals royalty companies in the US and Canadian markets.
Del Real gets us hotted up about the concept, maybe a little too much:
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“Once a royalty deal is signed…
“The payer is obligated to pay in good times and bad.
“It doesn’t matter if the gold isn’t mined yet.
“It doesn’t matter if the gold is late.
“The money has to be in the bank.
“This is why they perform in all gold markets — bear, bull, and sideways.”
Umm, that’s not really true. It DOES matter if the gold isn’t mined — royalties are a portion of the gold produced, usually a percentage of the net smelter return (ie, the actual amount that’s turned into gold bars from that mine). If the mine shuts down for a year for any reason, there is no royalty that year, not for a “normal” royalty (each royalty deal is a contract, so I’m sure there are some different structures). If the mine produces less gold, there is a lower royalty. If gold prices are lower, there is a lower royalty in cash terms. A typical royalty is not a guaranteed annuity, it’s effectively a share of the production — still a great thing to have, in my book, but let’s not exaggerate it that much.
And the one he’s specifically touting today is apparently a pretty new entrant in the space, here’s how he leads up to that…
“Sometimes these royalty streams are separated from the main gold mining company… and spun out into a new company that starts trading on its own…..
“Back in 2003, Goldcorp spun off its royalties into a new company called Silver Wheaton.
“Since then, shares of Silver Wheaton — now called Wheaton Precious Metals — soared more than 1,600%, leaving Newmont shares in the dust….
“Then, in 2007, Newmont spun off its royalty business into a company called Franco Nevada.
“Since then, shares of Franco Nevada have surged more than 1,200%. The royalty shares again significantly outpaced the mining shares….”
So the implication is that because sometimes these spun-out royalties “caught up” with the valuation of the former