Have you heard or seen the pitches for “Secret Income?” The spiel is that President Obama is not just earning his regular salary as President of the United States, but is also earning $72,000 a month in “secret” income. Wowzers!
Of course, we’ve seen it all before — whether it’s called “Mainz Income” or called “secret income” (or, per the XM radio ads I was hearing earlier today, the special sites “secretincome8.com” or “secretincome6.com” or whatever address they told you to go to to hear their free “presentation.”)
And yes, the ad is still the same one, more or less, that we’ve been writing about for years now — it’s still a pitch for Matt Badiali’s S&A Resource Report, which is an “entry level” newsletter in the natural resources space, and the hook is still “royalties.”
So yes, it’s silly that they’re conflating author’s royalties (that’s where Obama’s big monthly payouts came in in past years, from royalties on his bestselling books) with the kinds of royalties that publicly traded companies earn and sometimes pass through (in part) to shareholders like you and I … but the basic concept is understandable enough. Royalty companies own a right to something, they don’t actually do very much — so they might own a right to a fee for use of their patent or trademark, or a right to a certain percentage of the output of a gold mine or an oil well, or of the sales of a particular pharmaceutical that they developed or bought a piece of, or whatever.
The particular royalty-connected stocks that are pitched by Badiali using this spiel have changed over the years — we’ve seen the same tease, usually under the “Mainz Income” name, used to hint at the brilliance of buying shares of several of the oil or natural gas royalty trusts like the SandRidge Missisippian trusts, (SDT and SDT) or Sabine (SBR), or of the precious metals royalty and streaming companies like Royal Gold (RGLD) or Silver Wheaton (SLW), to share just a few examples. So what’s he touting these days?
Here’s how he puts it now:
“So, the question is… how can you use the ‘Mainz’ income secret to tap into demand for these limited resources?
“Well, I believe that one of the easiest and safest ways to turn a small investment into an incredible income stream over the next few years is to own royalty interests in these resources.
“In other words… your only investment is in the ownership of the valuable asset… the gold, silver, oil or gas fields.
“This way, you avoid many of the risks and expenses of the energy and mining businesses…
“Incredibly, many of these royalty interests are bundled into vehicles and are listed and traded on the New York Stock Exchange… so you can buy and sell them just like a regular stock.”
So which ones are being specifically recommended?
Well, unlike the last iteration of this ad there aren’t many specific clues about his favorite picks in the royalty space today — perhaps because almost all of them are quite beaten down and relatively inexpensive, even many of the oil and gas royalty trusts (despite pretty strong and stable energy prices — strong and stable compared, at least, to steadily price-dropping precious metals, the purview of most of the non-energy royalty companies and the reason those royalty companies have fallen hard in price this year).
It might be, in fact, that they’re pitching the whole idea of royalty investments but don’t feel strongly about the value of any specific ones over the others — which could be a reasonable stance.
Or perhaps they just got tired of your friendly neighborhood Stock Gumshoe sniffing around those clues and spilling the beans for free. Who knows.
So shall I just tell you which ones they’ve most often teased over the years?
Well, Matt Badiali’s favorite teaser targets in precious metals royalties have pretty consistently been Silver Wheaton (SLW), Royal Gold (RGLD), and Franco-Nevada (FNV), which are also, no coincidence, the largest “royalty” stocks on the market (with SLW being the largest by far). As you can imagine, SLW is mostly levered to silver and RGLD to gold, though there’s some overlap (SLW just did a pretty big gold deal, RGLD has some silver and a large nickel royalty, FNV has some energy and platinum group metals exposure). Badiali and his Stansberry colleagues have also suggested Sandstorm Gold (SAND) a few times in recent years, that’s the up-and-comer youngster in the gold royalty space that has suffered more than the big boys this year (and, of course, the one I own a substantial chunk of as most of my gold equity allocation).
So I suspect those are still Badiali’s favorites in precious metals royalties, though I have no idea which are his most favorite. RGLD and FNV are primarily royalty companies, they are fully passive and collect their percentage, usually a net smelter return (NSR) percentage from dozens of (mostly gold) mines. SLW and SAND are primarily streaming companies, meaning they buy the rights to a larger percentage of the mine’s output up front but then do have to pay a below-market price for that metal as it’s produced (in their portfolios it generally has averaged out at around $4-5 per ounce for silver, $400-500 for gold).
And in oil and gas, Badiali has touted many of the oil and natural gas royalty trusts over the years — but earlier this year when he was pitching the “Mainz Income” or “secret income” idea using Hillary Clinton’s name my supposition was that he was pitching the SandRidge Mississippian trusts (SDT and SDR) , both very high-yielding oil trusts with substantial levels of uncertainty about future payout levels. I haven’t looked at those in much detail because they were too tenuous and high-risk for my taste, but they and a few of their peers did and do carry very high dividends — there was a pretty good analytical piece about the recent collapse in oil trust prices over at SeekingAlpha about a week ago if you’d like a little more detail on some of them.
(Why Hilary Clinton? She also has earned a lot in book royalties — and really, for this particular pitch any polarizing figure will do, they’ve also used Bill Clinton and George W. Bush in these ads referencing their “secret” income.)
So … without any real clues I can’t illuminate for you today exactly which royalty company the “Secret Income” pitch is about this time — but there are an awful lot of them out there.
In general, the metals royalty and streaming stocks tend to be efficient and growth oriented, with relatively few employees and a focus on churning royalty income into buying new royalties (which means financing new and future mines), and some of the larger ones pay a (usually small, 1-2%) dividend. Their share prices have loosely tracked the big gold miners index (GDX) — FNV and RGLD have done a bit better than the average large gold miner over the past year, SAND a bit worse, but all were terrible in 2013… and FNV, RGLD, GDX, and SAND were also ALL worse investments than the actual shiny yellow stuff they covet as the gold price declined over the past twelve months, a nice reminder that being levered to a commodity means you amplify the impact of commodity prices both when those prices are moving up and when they’re moving down.
And the oil and gas royalty stocks tend to be US royalty trusts, which are finite and very controlled and are even more efficient because they have no employees and little in the way of costs at all — they’re just a way for oil and gas companies to offload predictable and boring producing assets to income-focused investors who covet those high yields, allowing the producer to pay down debt or spend more money growing and exploring. These trusts get a cut of current and future income from a particular region or from a specific set of producing and planned wells, usually in very predictable long-lived oil or gas fields, and they are expected to decline in production at some point in the foreseeable future. The trusts pay out essentially all of their cash flow direct to shareholders in the form of dividends/distributions (they’re not allowed to reinvest in growth, or to expand beyond the initial terms of the trust).
Both of these kinds of investments are plays, in some ways, on the beautifully simple royalty model — there’s something very appealing about a company that has little exposure to the headaches and unexpected costs of building or operating a mine or exploring for things and instead just sits back and collects their cut. That’s an oversimplification, of course, since the flip side of being a passive royalty holder is that you often have little recourse (depending on each specific contract) if the operating company decides to slow down operations or goes bankrupt and the project is shelved or stopped or delayed (or, as with Sandstorm Gold and much more severely with their sister Sandstorm Metals and Energy, if a commodity crash sends the operators into bankruptcy). And there are a few real stinkers in the royalty space that are approaching worthlessness because they’re getting close to the end of their dividend-paying life (like GNI or WHX), so for trusts in particular it is always very important to understand exactly what you’re buying, and particularly the expected life of the trust and their production levels for that lifetime.
But still, I do like royalty companies as a general rule — the best ones tend to be cost-conscious, shareholder-focused, and nicely levered to the price of the underlying commodity without being overly levered the performance of a specific mine or project. The best ones are usually pretty expensive, but if you think the beating is over for gold or silver or other commodities, or that the operational challenges for many of those newer oil trusts are overstated, well, most of them don’t look that expensive these days.
My personal holdings that could be fairly described as being royalty stocks are Altius Minerals (ALS in Toronto, ATUSF on the pink sheets), Sandstorm Gold (SAND), Dorchester Minerals (DMLP), as well as, if you want to stretch it a bit, the pharmaceutical royalty company Ligand Pharmaceuticals (LGND). I don’t currently own any of the other stocks mentioned above, and won’t trade any of the stocks mentioned for at least three days.