Gold Royalty Companies

Gold financing companies are a leveraged play on gold prices.  These companies sponsor gold miners and receive future streams of gold royalties.

A brief look at the 4 major royalty companies:

Silver Wheaton

Only 52% of their 3Q19 revenue was from gold, with 46% from silver.  Didn't bother to look any further.

Franco Nevada Corporation

Franco Nevada is a large company, with 56 producing streams, plus 237 in exploration & development.  (This excludes another 81 energy streams - are they becoming so big they have diffiiculty funding sizeable precious metal streams?).  2/3rds of their 3Q19 revenue is from gold.

They are well diversified.  The two largest projects make up 26% of revenue, the largest 4 make up 42%.  Half their revenue comes from Latin America.

Debt is roughly 2 years' CFO.

For valuation, TTM EV/EBIDTA is 37 (at a stock price of USD 99).  Very expensive.  If I annualise their latest 3Q19 earnings (due to the gold price being higher in the last quarter), EV/EBIDTA is a more reasonable 24.  This shows how leveraged to the gold price this type of company is.

Correlation with gold price: Its daily return has a correlation to GLD of 0.65  over the past 10 years, and 0.73 over the past 6 months.

Royal Gold

Another large company.  They have 7 producing royalty streams, plus 35 producing royalty interests.   78% of their 1Q20 revenue is from Gold.  

They are conservatively geared: debt is 60% of CFO.

They are very concentrated: Their top two streams make up 44% of revenue, and the top 4 make up 65%.  41% of their 1Q20 revenue is from Canada, followed by 22% from Chile. 

Based on annualised 3Q19 earnings, EV/EBIDTA is 22 (at USD 118 stock price).

Its daily return has a correlation to GLD of 0.65  over the past 10 years, and 0.54 over the past 6 months.

Sandstorm Gold

A mid-tier company, with 23 producing streams, plus 167 in exploration & development (appendix iii).  At least 2/3rds of their net income was from gold in 2Q19.

They are conservatively geared: debt is slightly over 1 year's CFO.

There is some concentration risk.  Their largest 2 projects make up over 30% of CFO, and the largest 4 make up nearly 60%.

A large boost in gold production is expected in 2022:

This projected increase is from their Hod Maden mine in Turkey.  They have a lot riding on one project.  There is execution and political risk here, with a lot of upside.

Based on annualised 3Q19 earnings, EV/EBIDTA is 15.6 (at a stock price of CAD 6.92).

Its daily return has a correlation to GLD of 0.57 over the past 10 years, and 0.69 over the past 6 months.

When do we buy gold?

Gold goes up when interest rates go down.  Because it reduces the opportunity cost of holding (interest bearing) cash.

Gold is the Anti-Dollar.  You buy it if you think USDs are going to be worth less in future.  And you would hoard it if we had negative interest rates.

I see gold as a way to short the S&P 500.  If it has another sharp sell off, like in 4Q 18, the Fed will cut and gold will go up.  Gold is uncorrelated with the stock market (GLD and SPX have a correlation coefficient of -0.29 over the past 10 years, and -0.03 over the past 6 moths).

I've bought a small amount of FNV, RGLD and SANDS two nights ago.  Altogether makes up 2% of my portfolio.  I may increase it slowly, later.  This is a trade with a 6-12 months timespan - I do not want to hold gold as a long term investment.

Some links:

1) https://www.stockgumshoe.com/reviews/extreme-value/solving-ferris-extraordinary-upside-in-rare-13-gold-stock-tease/
2) https://seekingalpha.com/article/4231139-skin-game-key-differentiator-capital-intensive-sectors