Matt Badiali edits the S&A Resource Report, which is an “entry level” (ie, less than $100 a year) newsletter that’s currently “on sale” for $39, and his latest pitch for new members has caught the attention of many of the folks in Gumshoe Nation.
He’s pitching something he calls “Secret Gold Societies” … and if you’ve been around these parts for a while, you might have a fair idea already of what he’s talking about, but bear with us for a moment.
As always, they spin a good tale in getting you interested — Matt talks about how he’s a “normal guy” who’s managed to find himself in the company of gazillionaire gold investors, and he’s going to share their wisdom with you. Here’s how he puts it to give you a little taste:
“My Secret Double Life: How I Infiltrated America’s ‘Secret Gold Societies’
“A personal account of how I became involved with of one of the wealthiest and most exclusive groups in America….
“On the surface, no one would have guessed the amount of wealth inside our little group… or the secrets discussed. Our group included several of the richest men I know. The Scion of a California oil family, whose grandfather’s oil company sold for hundreds of millions of dollars. Another was an industry mogul who lived half the year on a sailboat in the Caribbean Sea.”
And then he gets into what this group of wealthy people and these secret societies do …
“Inside America’s ‘Secret Gold Societies’
“As you may have guessed, the group I’ve been telling you about focuses on the gold market.
“Again, because that’s where the money is. Gold has been used as a store of wealth for thousands of years, and so to us, especially in times like these, it is obvious for us to focus on something that has continued to be a store of value for nearly every culture around the globe….
And he talks about why these “societies” do things differently, not just buying bullion or mining stocks or coins …
“… take conventional gold stocks. On one hand, they can certainly skyrocket in value, but they are extremely volatile. It’s also a very capital-intensive business. All the money that mining firms have to spend on equipment, labor, and processing facilities makes it a tough business. A poor management team can easily wreck a gold company… and cause shares to plummet in value.
“This is why gold stocks are one of the most volatile sectors in the financial markets. While I have had past success with some gold stocks… and do recommend them in certain situations, it’s tough for most folks to make money with them.
“Then there are rare coins…
“Rare coins can increase significantly in value, but they typically only rise when the gold price rises – and, as we’ve seen in recent years, sometimes they actually go DOWN when gold prices rise simply because the idea of collecting rare coins goes out of favor, for whatever reason. These coins are also harder to buy and sell than most investments.
“The point is, while I wholeheartedly believe in gold, the truth of the matter is that most gold investments have big disadvantages.
“And this is why some of the smartest and richest people I know, who believe, as I do, that gold is the best form of ‘real money’ on the planet, have gotten together and created a totally different way to help investors safely make a fortune from this precious metal.
“Most Americans have no idea that there are small groups of men and women whose knowledge of, and operations within the confines of the gold market, have created the amazing opportunity we now see before us.
“I call these groups ‘Secret Gold Societies.'”
So there we finally get down to the brass tacks — he says that although many of these “secret societies,” like the ones he mentions in his tales of hobnobbing with the wealthy, are private, but that there are a “handful” that are publicly traded …
“these ‘Secret Gold Societies’ operate in a completely different manner from mining companies or any ordinary business, for that matter.Are you getting our free Daily Update
"reveal" emails? If not,
just click here...
“Yet, they are helping to make everyday folks extraordinary sums of money from the best form of ‘real money’ in the world.”
So what are they? Well, as is newsletter ad copywriter tradition, they’ve given them all mysterious names so that you have to subscribe to the newsletter to figure out the real deal. But have no fear, the Gumshoe is on the case!
The first “secret society” he teases is something he calls the “Highlands Gold Society.” Here’s how he spins that tale, and in the process explains the basic premise of these “secret societies” and their business strategy:
“In Highlands Ranch, Colorado – an ordinary Denver suburb – between Garbanzo Mediterranean Grill and Target, sits a red and tan brick office building, which blends in quietly with the surrounding architecture.
“But in Suite #400 of this building you’ll find one of the most extraordinary investment secrets in America….
“The entire operation consists of just 20 people. About half are experts in finance. The other half: former mining executives and geologists.
“You see, what the ‘Highlands Gold Society’ does is quite ingenious.
“They don’t mine. They don’t produce. They don’t own drills, or trucks, or any of the other incredibly expensive trappings of the mining business.
“Instead, this group finds companies in the gold industry that need help in some area of mining or production. For example, a company might need cash to build a new smelter… or an ore crusher… or it might need to finish an exploration project… or help getting a mine permitted…
“For example, in one of their earliest deals, the ‘Highlands Society’ gave a young mining outfit, called Western States Minerals, $2 million to construct a leaching mill and ore crushing plant on a promising gold property in northern Nevada. More recently, the group gave another mining outfit $2.8 million to help it complete a mine on a piece of land in southern California.
“So, the ‘Highlands Society’ provides financing, geological expertise, and other services…
“Then – and this is the most important part – instead of getting paid back in cash… the ‘Highlands Gold Society’ takes payment in the form of a percentage of gold that the project produces… often for the FULL operational life of the mine.
“That means these ‘Secret Gold Societies’ can potentially get paid extraordinary sums of money for 10… 15… even 30 year stretches, from a single operation.”
Sounding a bit familiar, is it? Yes, he’s talking about the natural resources financiers that we typically refer to as royalty or streaming companies, firms who provided financing and who in return receive not principal and interest but a share of the (gold, in this case) production from the project they’re financing.
And this particular one is the oldest big public player in the business, Franco-Nevada (FNV in both Toronto and NY)
Franco-Nevada is a Canadian corporation, with headquarters in Toronto, but the US office is indeed a relatively small operation in Highlands Ranch, Colorado, and it is indeed in Suite 400 of a small office building near a bunch of suburban strip malls. We can stipulate that it’s not particularly glamorous.
But that’s not necessarily surprising — all of the royalty and streaming companies are light on overhead, they don’t need a huge fancy office or a thousand drones to do their work, they need capital and some smart geologists and accountants and negotiators to make royalty deals that are attractive to near-production miners but that also can pay off dramatically over a long period of time.
And that Western State Minerals deal that they made back in 1986, the first royalty that Franco-Nevada bought, provides the kind of temptation that drives all of these kinds of companies and investors — they paid $2 million for the royalty, a huge amount for the them at the time, and it paid off fairly quickly and then generated massive cash flow above and beyond their initial investment, reportedly spinning off $23 million per year for Franco-Nevada by 2002. This was, undoubtedly, part of the inspiration for the switch in focus of the company — like most royalty companies they started out as a mineral explorer, and somewhere along the line, in the mid-1990s, they realized they could make a lot more money with a lot less work by letting other people take the exploration risk and putting in relatively small amounts of capital into projects that were near production. In reality what they did was just take the well-established royalty model in the oil and gas business, and scooch it over into precious metals and mining.
Oh, and don’t be confused by their relatively recent (2007) IPO — they have actually been around and operating for 25+ years, it’s just that they were owned by Newmont Mining for five years, from 2002-2007.
Franco-Nevada also has a substantial portfolio of non-gold royalties, largely oil and gas royalties, but most of their focus is on gold these days and gold and platinum group metals provide more than 90% of their revenue. I don’t think I’ve written about the company since they finally got a New York listing and raised their profile with US investors last Fall, but despite the more diversified portfolio they are the largest precious metals royalty company that you can buy. You can see their latest presentation here, including 2011 results and their projections for growth from both acquisitions and the continued development at their various royalty interests. Franco-Nevada pays a monthly dividend of about 1.4% and has indicated that they intend to keep the dividend growing over time … and while revenues might not double again in the next two years like they did over the last two, they’re certainly growing fast enough to spit out a lot of cash if they want to.
Assuming, of course, that the gold price doesn’t collapse and force miners to shut down their operations. In most cases, royalty owners get a share of the production or a share of the revenue, and they carry no obligation to pay for cost overruns, or high fuel prices … but in return, they don’t get a say in operations, and if the mine shuts down for a couple years they just … wait. So it’s great that they don’t face the logistical or cost problems of miners, but that doesn’t mean that royalty owners should gloat too much if costs skyrocket or a mine floods or something like that, they don’t have to shell out more money but they can certainly see the royalty stream wither for a while if production gets cut, or die away if the mine closes down, so there is a bit of risk-sharing involved in that way, particularly early on in a mine’s life if the initial royalty investment hasn’t had a chance to get paid back yet.
So that’s one big, diversified royalty owner — sorry, “secret society.” Who else is Badiali teasing? And yes, if you’re interested or invested in this sector you can probably guess the next one … but don’t spoil it for everyone else!
Clues for the next one?
“‘The Wynkoop Society’
“Less than 5 miles away from the offices of the ‘Highlands Gold Society,’ sits the headquarters of another ‘Secret Gold Society.’
“They are known in some circles as the ‘Wynkoop Society.’
“Their operations are similar to that of the ‘Highlands Society.’
“About 20 people occupy a single suite on the 10th floor of a non-descript office building. Again: about half of these folks are financial experts. The other half: geologists and former mining executives.
“They put together almost identical deals too.
“For example, a few years back the ‘Wynkoop Society’ gave a small Montana-based company – called ECM – $1 million to finish some drilling work on a mine they were developing in Nevada.
“In return, ECM agreed to give the ‘Wynkoop Society’ a cut of the production from the mine – for the entire operational life of the mine.
“So how much have they made from the deal?
“Well, since the deal was struck – in 1991 – the ‘Wynkoop Society’ has brought in more than $200 million in revenues from this operation alone.
“Not bad for an original investment of $1 million, right?”
So who is this one? The “Wynkoop Society” is referred to by everyone else in the world as Royal Gold (RGLD)
Which does happen to have its headquarters in Denver, not far from Franco-Nevada’s US offices … and they’re on Wynkoop St., on the tenth floor of an office building. I assume it’s non-descript, but I’ve never been there.
Royal Gold is the smaller cousin to Franco-Nevada, they are far and away the two largest gold royalty companies and both are quite large now, RGLD has a market cap of almost $4 billion compared to FNV’s $6 billion. RGLD also pays a growing dividend, though it remains paltry at the current price (about a 1% yield), and it also started out life as a disappointing explorer and prospector but moved into the royalty business with a few savvy deals … and enjoyed a fabulous ride as gold prices climbed over the past decade.
You can see the map/list of royalties that Royal Gold owns here, they have a few massive properties that provide their “cornerstone” royalties and which they expect will pay off for decades, including well-known large mines like Penasquito and Voisey’s Bay (the latter being a nickel mine, unlike most of their precious metals portfolio — a royalty acquired when they took over International Royalty Corp a couple years ago). The company fact sheet does a good job of laying out their core royalties for both base-level revenues and for potential growth.
RGLD carries a similar valuation to Franco-Nevada, both are trading at between 25-30X next year’s earnings estimates, and both are levered to gold with limited mine-specific risk, pretty good portfolio diversification, a nice foundation of royalty deals that they entered into years ago, when gold prices were far lower, that are paying out huge these days. I don’t know much about the specific operations of each company — whether one is better than the other at striking deals, for example, or maintaining the low-cost operations that help to keep royalty investing such a high-margin business, but both have certainly been at it for a long time and are probably the first ones to get the call when capital-hungry miners want to negotiate royalty deals on large gold projects.
And yes, there are other benefits to the deals that these companies make that can keep them rolling in the dough for a long time — including what Badiali refers to as “tail contracts,” which basically just means getting a royalty on exploration projects nearby when you buy a royalty on the mine that’s already been identified and is being built — these “exploration royalties” are much less expensive, and often, I’m sure, don’t pay off, but when they do it generates more revenue over what can sometimes be an extremely long period of time (decades).
And yes, we can stipulate that buying RGLD before the decade-long bull market in gold would have been a brilliant move — those shares have moved from about $3 to $80 since 2000, though they’ve come back in a bit with the drop in gold prices and you can now buy ’em for around $60 if you so choose. Heck, if you went back to the mid-1990s, before they were really much of royalty company, you could have bought shares for probably 30 or 40 cents.
A fact which does us no good, of course, other than to make us jealous and angry.
So to salve our wounds, should we check out the next “secret society?”
“The ‘Waldorf Society’
“You see, so far, the focus of this video has been to give you the full details on the little-known “Societies” making huge sums of money in the gold markets.
“But what I haven’t told you yet is that there’s another “Secret Society” that’s also making colossal gains – not in the gold markets – but rather, in the silver markets.
“I call it the ‘Waldorf Society.’
“I’m sure I don’t have to tell you that one of the biggest trends in the world right now is silver. I’m not sure if you know this or not, but silver is actually one of the best performing assets of the past decade. While gold has gone up a very nice 480%, silver has gone up even more, a whopping 730%. And the great thing is, silver is still way undervalued in comparison to gold.
“As I’ll show you, what the ‘Waldorf Society’ does is absolutely incredible. It’s managed by one of the smartest and most respected gold and silver project developers on the planet.
“The business – run by about 2 dozen geologists and financial experts – owns very profitable operations in Mexico, the United States, Canada, Greece, Sweden, Peru, Chile, Argentina, and Portugal.
“Most importantly, anyone who’s already taken advantage of this opportunity is seeing extraordinary returns — several times what they would have seen by investing in the stock market – or even silver bullion – as a whole….
“The potential in silver is absolutely incredible… this operation is the only business of its kind in the world and I expect a safe and simple investment today could return many times your money over the next few years.”
Well, I have no idea where the “Waldorf” name comes from in this particular one … but the stock they’re teasing is clearly Silver Wheaton (SLW), the largest royalty/streaming company in the world (market cap of about $11 billion, bigger than Royal Gold and Franco-Nevada put together) and the only one I know of that’s focused specifically on silver.
And Silver Wheaton has a very different business — while RGLD and FNV are primarily royalty owners, SLW is primarily a “stream” owner, they also make a lump sum up-front investment, but instead of getting the right to 1% or 4% or whatever of the net revenue (there are lots of different kinds of royalties, that’s just an example), they get the right to a larger portion of the production from the mine but have to pay a set per-ounce price.
What makes Silver Wheaton stand out, though, is that they have silver deals on some truly massive mines and those silver deals were made because the miners considered the silver to be a byproduct — something they could sell early on to hedge their risk without really impacting what mattered to them, which was the copper or zinc or gold or whatever else the mine was designed to extract (silver is almost always a byproduct, there are very few “pure” silver mines in the world). And they started out as a controlled partner, then an independent partner of a major gold company (Goldcorp), so they had some early access to very big projects (they’re independent now).
And, of course, silver had a remarkable run for a while there in the early 2000s, so Silver Wheaton buys a huge amount of this silver from these large mines at prices that average something ridiculous like $4 per ounce, and they sell it at the spot rate (north of $30 an ounce now), and don’t have to pay mining costs or anything else — so the margins are stupendous and as long as these mines keep producing and silver stays very high, they’re going to generate an ungodly amount of money.
But it’s silver, which makes folks scared because silver investors have been burned before — silver is as much an industrial metal as it is a precious metal, so economic collapses bring down the price, and over time some large impacts have really clobbered silver prices from time to time (like the death of traditional photography, which used to use up a large portion of the world’s silver)