Over the past few years, gold stocks have lagged significantly relative to bullion itself. Royalty stocks, however -- meaning stocks that focus on owning revenue derived from mining properties via royalty agreements rather than mining exploration and operations -- have been notable outperformers. The two most notable gold royalty stocks, Royal Gold (RGLD) and Franco Nevada (FNV) have done much better than senior gold mining stocks (GDX), as the chart below illustrates.
The appeal of royalty stocks is fairly straightforward; you get the upside of appreciation in bullion and lucrative gold deposits without the costs and headaches of big trucks and drilling operations. As the bull market in gold accelerates and as we enter the next phase in which I believe miners will outperform bullion, I think the appeal of quality royalty stocks remains strong.
While the aforementioned Franco Nevada and Royal Gold get most of the attention in this space, I don't think they're the best opportunities available. Here's a quick run down of royalty stocks I like, and already have or plan to add to my portfolio:
1. Silver Wheaton (SLW). As the name suggests, Silver Wheaton is a silver royalty stock. It has FAR outperformed the aforementioned stocks; see the chart below.
Normally when I see a chart like that I think the opportunity has already left, but in this case, I don't think that's true. Silver has had a massive correction and thus a strong case could be made that it is oversold (although I do favor gold over the long run, as I don't think silver is going to get re-monetized while I think gold will). More importantly in my opinion, though, is that SLW has a P/E ratio of under 28, while both RGLD and FNV are over 40. SLW also has a market cap of 12B -- twice that of FNV and nearly three times that of RGLD, while also issuing greater dividends than both. So, I regard it as the better value play because of its fundamentals, though when silver returns to a point of being overbought, I would recommend considering selling.
2. Eurasian Minerals (EMXX). I recently blogged about Eurasian Minerals, outlying why it's a strong buy with significant upside potential. As it is in the prospecting business it naturally is inclined to seek out royalty streams, and today's acquisition of Bullion Monarch (BULM.OB) illustrates that point nicely. Bullion Monarch derives virtually all of its revenue from a 1% royalty on a mine in the Carlin region of Nevada.
3. Corvus Gold (CORVF.PK). Like Bullion Monarch prior to its merger, Corvus is a very small company -- market capitalization below $50 million -- with royalty rights in Nevada (known as the North Bullfrog Project). While the United States undeniably has some serious problems, I still find it to be a much better region for miners to operate in than many areas in South America and Africa. And has Nevada has produced over 79% of the total recorded historical US gold output and over 5.6% of the world output, I think Corvus is on solid ground for this alone -- let alone its operations in Alaska.
4. Tanzanian Royalty Exploration (TRX). TRX has long been a favorite of mine, as I've noted in my previous SeekingAlpha commentary, and part of the reason for this is the firm's interest in securing royalty rights. Specifically, TRX has a joint venture royalty agreement with Jinchuan Mining, China's largest producer of nickel and cobalt, for the Kabanga nickel properties. While this is not a gold royalty opportunity, I do believe nickel and other base metals will rise in the years to come due to dollar devaluation and ongoing growth in China. The terms of this joint venture give TRX a 30 year royalty stream -- long enough for nickel prices to steadily appreciate along the way.
For those who believe a bubble in mining stocks is increasingly likely, I believe firms with strong royalty projects may be particularly well-positioned to outperform the mining industry at large and give their shareholders even better returns.