The best way to buy into gold isn’t through the miners, it’s through the royalty companies.
Royalty companies make money by buying chunks of the production from the miners, and then getting paid royalties for their investment in the project.
They don’t own the mines, which means they hold zero obligations for the cost of operations, labor, etc.
Today, I’ll reveal my favorite royalty company…
The Average Investor’s Mistake
The average investor is usually perfectly content buying a standard gold mining stock. The story is just too damn simple to pass up…
Miners look for prolific mines – then sell gold and make money.
It doesn’t get much simpler than that! It’s a winning strategy, too… At least until prices for the commodity plunge below a company’s cost – which is exactly what’s happening right now.
You see, setting up a mining operation isn’t cheap. It takes billions of dollars to develop a world-class mine.
Then you deal with operating, permitting, transportation, and labor costs – not to mention the costs to run the administrative side.
These costs are easy to cover when you’re operating with fat profit margins. But when those margins start to shrink, look out below!
It’s why gold mining companies are writing off assets left and right today.
Heck, even in gold’s heyday – when it rose seven-fold from the early 2000s to the end of the decade – mining stocks still didn’t outperform the actual price of the metal (except for a few of the highly leveraged penny stocks).
Still, most investors continue to be enamored by the miners.
As I mentioned above however, royalty companies are where you should be looking. And here’s my favorite play right now…
The No-Brainer Gold Investment
Franco-Nevada (NYSE:FNV) is one of the premier plays in the sector, and the shares are just off their 52-week highs – at a time when the vast majority of miners are just off their 52-week lows.
Franco makes money using a royalty-streaming model.
This is different from a standard royalty structure in a few ways: The initial stake is usually larger, meaning Franco will receive larger payments than a standard royalty play. This model also offers more flexibility in negotiations in terms and conditions, and it can be modified to provide both parties with significant tax advantages over time. (Franco explains more about the royalty-streaming on its website.)
Simply put, it’s similar to a license - only in this case, it’s a license to mint money!
And since royalty companies benefit from not having to deal with the massive operating expenses like traditional miners, there’s a huge downside cushion built in for investors. Yet you can still benefit from the upside once the price of the underlying metals moves higher.
Plus, Franco just raised its dividend by 11% a few weeks ago on the back of stronger production numbers. The company expects that trend to continue as it applies the royalty model to other industries – like oil, gas, and industrial minerals – to offset weaker industries like gold and silver mining.
Bottom line: The precious metals mining sector looks weak right now. Some analysts – including my friend and colleague, Rick Rule – believe that we are in a bottoming process. So now is certainly the time to get on board, and the royalty model is as close to a no-brainer investment in the sector as you are going to find!
And “the chase” continues,
BY Karim Rahemtulla