“$72,780 PER MONTH ‘Mainz’ INCOME STREAM Found Inside President Obama’s Tax Returns”

Badiali's new "Mainz" teaser touts "Gold Royalties: The Real Secret To Generating Huge Returns In America's Precious Metals Markets"

By Travis Johnson, Stock Gumshoe, June 27, 2012

[The “Mainz” Teaser Term has been used several times, click here for the most recent articles]

Matt Badiali is again invoking the “Mainz” name as he teases royalty companies — the “Mainz” bit refers to the home of the Gutenberg printing press, which enabled mass-production of creative works for arguably the first time, and thus brought the potential for expanded “long tail” income as each individual work could generate more revenue, and do so over a longer period of time.

As an aside (asides already? Jeez, this might be a long one), the real enabler of that kind of royalty income is not just the physical capability to make copies, of course, but the regulatory framework to protect intellectual property from being copied again — so it wouldn’t surprise me to see some copywriter start to refer to these kinds of royalty investments as “Statute of Anne Income” — that piece of British law is not quite as old, but it has been around 400 years and set the stage for modern copyright law. Go ahead, Stansberry and Motley Fool and Agora copywriters, you can have that idea for free!

Anyway, we all love the idea of royalty income because — like President Obama’s book royalties, or Hillary or Bill Clinton’s book royalties which have also been cited in similar past teases — they sound like they’re “free money, no work.” Or at least, no more work after you do that first bit.

As far as I’m concerned, this is the key section of the ad — this is where Badiali explains the importance of what is effectively “passive income” over a long time period following an initial investment (whether of time, talent, or money):

“In every industry there’s usually a backdoor way to get paid OVER and OVER again for a single idea, property, or patent.

“In the drug business, for example, the big money is in patents.

“After all the work is done developing a new drug, for example, a scientist can partner up with a larger company to handle the expenses and risks of testing, marketing, and distribution.

“Then the patent holder gets paid for every prescription that gets filled. The guy who developed the popular pain medication Lyrica, for instance, shares in more than $2 million per month because he owns the patents. The ladies who owned the patents on the anti-fungal medicine Nystatin shared in more than $50,000 per month.

“In the publishing business the big money is in royalties.

“Once you do all the work writing a book, you just sit back and collect your share of the profits. President Barack Obama, for example, makes on average more than $72,000 PER MONTH from sales of his best seller, The Audacity of Hope.

“In fact, this is why we call it the ‘Mainz’ income stream secret.

“You see, the Guttenberg Press, which was invented in Mainz, Germany, is generally considered the invention that first made collecting regular royalties possible, by allowing book publishers and authors to make a fortune after creating a valuable piece of work.

“And to this day, the ‘Mainz’ secret remains one of the great low-risk ways to get rich in America.

“You make just one investment… or control one valuable asset… and then get paid over and over again, while somebody else takes the risk of marketing, development, and distribution.

“Now… don’t get me wrong… I’m not saying you should go out and develop a new drug, or write a book, or record a record, or anything like that.

“You see, what I’ve found is that there are some incredible (and low risk) ways to use this secret as an investor. In short, you avoid all the normal risks of doing business… and simply collect incredible royalty streams for owning a very valuable asset.”

And on that point, I agree with Badiali wholeheartedly — I love royalty companies. Though I would also point out that most books never generate any royalties, most drug compounds never get approved, and most mineral exploration leads to nothing. So the big numbers, like Obama’s hefty book royalties, skew the fact that most of the initial investment into these ideas (the years you spent writing a novel, the decades spent searching for a cure for cancer, etc.) is wasted … at least in a financial sense.

But to keep the analogy to publishing: if you can get in on a deal that’s a bit more certain than investing in an unknown author who’s just starting a book, you improve your odds of a nice hefty and long-lived royalty stream (ie, buying a share of the next Stephen King novel before he writes it, because you know he’s written few duds and the sales should be strong; or buying into a new novel that’s just about to come out and that you, a publishing expert, have read and expect to be the next Harry Potter).

So that’s the general idea: Invest in royalties, and you own a share of a future income stream without the attendant costs of producing that income — so, for example, if you have volume-based royalty on Stephen King books of $1 per book, or whatever it might be, you don’t have to care much about whether the paper and the distribution costs the publisher fifty cents this year and $2 next year, your cut remains the same … as long as it sells, you get your cut. That’s certainly not how most book royalties work, I’m just extending the example.

What, then, is the specific idea? We last wrote about Badiali’s tease for these “Mainz Income Streams” back in 2010 … is he still teasing the same royalty companies, or has he changed his ideas with the times? Let’s get into the specifics …

He gives a couple of examples of publicly-traded royalty investments that always sound intrinsically appealing — including the A&W trust (AW-UN in Toronto) that we’ve covered before, and the Mills Music Trust (MMTRS — that one’s very tiny and illiquid — they own royalty rights on some old EMI-owned songs, most of the money comes in from Christmas carols and old standards from the 1930s-50s like Little Drummer Boy and Minnie the Moocher, it has a varying yield of roughly 8% at the moment and the copyrights on their oldest important revenue-generating works began expiring in the mid-1990s, though most will be under copyright for another 10-30 years).

And then he starts to tease what he’s actually recommending … which turns out to be … gold royalties. Yes, that’s different from our last traipse down the “Mainz Income” aisle in 2010, because in 2010 the first version of this tease steered us toward US natural gas trusts. Which have, naturally, been clobbered with the declining price of natural gas.

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He gives a few points to argue in favor of investing in gold royalty companies — but mostly, the argument comes down to the simple point that the few royalty companies around have done better than the average miner in recent decades, and, because they’re diversified and they locked in deals ages ago when prices are lower and they don’t have to worry much about mining costs (all-in costs for many mines are more than $1,000 per ounce produced), they are safer. I don’t dispute that, and I went into some more detail on these when I jumped into a longer discourse on royalty investing for the Friday File about three weeks ago (you can see that here if you’re logged in as a paid member — or click here if you’ve been meaning to join the Irregulars and just keep forgetting).

So which royalty companies is he teasing us with today? Well, the list of reasonably sized ones is very small and we end up writing about them with some frequency, so I can’t say that today’s piece is a massive challenge for the Thinkolator … but it’s always interesting to see which picks one of the gurus highlights. Here are our clues:

“Royalty Stream #1: This gold stream was founded by a lawyer and geologist in the early 1990s. Over the past 10 years, shares have gone up more than 2,300%, several times more than many of the world’s top gold miners – and more than 11-times the stock market’s return over the same period. Since the early 1990s, the returns have been even greater. Every $1,000 invested has become $2.4 million. I strongly believe you should consider owning shares of this gold royalty stream beginning immediately.

“Royalty Stream #2: This royalty stream, since it began in the early 1980s, has helped everyday Americans turn each $1,000 invested into well over $1.1 million by 2002. That’s an average return of 38% PER YEAR (and that’s not including cash dividends). This investment was founded by one of the smartest gold investors in America. He’s the former CEO of one of the world’s largest mining operation. He is also the former head of the World Gold Council. Today, this royalty stream has stakes in nearly 40 projects around the globe, with 22 more coming online in the next few years.

“The thing to remember here is: Over the last 5 years, this investment has gained more than 50-times the stock market as a whole.

“It simply doesn’t get much better than this in the investment world.

“Royalty Stream #3: This royalty stream recently went public – in 2008 – and has already produced gains as high as 350% – outpacing the returns of the other royalty streams I’ve been talking about.

“This is a rare chance to get in at the very beginning of what could be one of the most financially rewarding royalty streams to date. I expect a safe and simple investment could return many times your money over the next few years.”

Sound familiar? Yes, these are also the “Secret Gold Societies” that Badiali teased a while back, #1 is Royal Gold (RGLD), #2 is Franco-Nevada (FNV) and little #3 is Sandstorm Gold (SSL in Canada, SNDXF on the pink sheets).

I won’t bore you by copying over my commentary on each of those three from April, when we covered the “Secret Gold Societies” (He also pitched Silver Wheaton on the silver front back then as well, and later on in this latest “Mainz” ad he hints at SLW again, too). They’re all good companies, I own only one of them (Sandstorm Gold), and they have tremendous leverage to rising gold (and silver) prices with relatively less risk than the miners themselves, and their businesses haven’t changed in three months so if you want more of my blather you can get it here.

These companies have less leverage than a junior explorer who finds a big deposit, of course, and even less than a producer who ramps up production quickly … but the spikes you can get from such companies are often accompanied by heartburn as you worry about the risks and variable expenses of mine-building, diesel fuel, regulatory changes, accidents, permitting, etc.

RGLD is the biggest and most well-known of these, and they have some trophy assets, but they’re also the most expensive — If I were starting today at these prices I’d probably pick FNV for a larger and more diversified royalty firm or Sandstorm if you want a slightly riskier small streamer that should be able to grow revenue and margins more quickly, but, in all honesty, if gold and silver go up you’re going to do fine with any of these … and if gold goes down past $1,200 or $1,000 and stays low for a while they’re all going to be a bit challenged because some mines will probably be forced to shut down or slow down and therefore pause those royalty streams, and the streams or royalties themselves will generate less revenue at lower prices.

Royal Gold is also being actively touted by Ian Wyatt as his “forever gold” pick which implies great dividends, and it does have a growing dividend but the payout remains quite small at these prices — Franco-Nevada pays a small dividend too, for what it’s worth. If you want more ammo one way or the other, Frank Holmes over at US Global Advisers has Franco-Nevada as his largest holding in their Gold & Precious Metals Fund, which is a worthy endorsement (they own RGLD too, just a smaller piece).

The nice thing about royalty companies is they have pretty fixed expenses to go with their leverage to commodity prices — once you’ve got a couple experts on staff you don’t need to add a dozen more if you buy a few more royalties. Franco Nevada has about 20 full time employees as a $6.5 billion company, and Sandstorm Gold has about nine employees as a $600 million company … and there aren’t many corporate costs other than buying the streams or royalty rights (a capital investment) and supporting that small employee base. The bad thing is that you have counterparty risk and a lack of control over projects — so you’re counting on the miners to fulfill their duty to you under contract, but most deals don’t provide for much if any recourse if the mine shuts down for a few years, that’s the shared risk and the passive nature of these royalties and streaming deals. If the mine operates, risk is lower; if it doesn’t operate, their percentage of zero output is, well, zero and in some cases where it goes beyond the mine just shutting down as a poor performer they’ll be left going to bankruptcy court to get in line (often the front of the line, thankfully) as a creditor.

You don’t have to look much further for this risk than Sandstorm Gold’s sister company, Sandstorm Metals and Energy (which I also own — SND in Canada, STTYF on the pink sheets) — they spun off this business a couple years ago and got started with two big coal streaming deals, and they’ve been clobbered (maybe over-clobbered, I’d argue) as a result of the collapse in thermal coal pricing and the failure of one of those coal companies. That remains a much longer-term play as a result, some early mistakes in due diligence and/or bad luck have pushed out cash flow expectations further into the future, but I continue to hold the shares and was actually considering buying more at depressed prices (I haven’t yet) because of the generally good environment for financiers (little miners are a bit desperate) and their large cash position. I’ve been quite wrong on this one so far, so be careful.

Bored with these royalty/streaming ideas yet? I’ve become so enamored of this kind of passive investment over recent years that I rarely am all that tempted by actual miners anymore, but the clean and easy-to-sell idea also makes these a natural fit for newsletter teaser ads and we’ve probably covered them to death as a result. Still, if you’ve a favorite in the great RGLD SLW FNV SSL pantheon, or prefer a smaller up-and-comer who isn’t on that list, feel free to shout out your reasons why with a comment below. Thanks!


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