“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.

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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’