How To Invest in Gold Royalty Companies

Let’s face it – mining is one of the worst business models in the world.

And we won’t be the first one to tell you that.

This is a sentiment shared by some of the greatest fund managers in the world.

Before drilling or production even starts, you have to first pay geologists to scour the land in search of prospective gold deposits. Then, mining companies must deal with massive building, infrastructure, and permit expenses – all of which can cost a fortune alone. You may even have to rent or buy chunks of land too… often in dangerous countries.

And even after all of that, the risks are endless…

Every mine may be challenged by:

• Environmental issues

• Strikes

• Shifting political regimes

• Engineering problems

• Market capitulation

• Wasted drilling campaigns

...You get the point.

But there is one sector of mining stocks that completely avoids most of these pitfalls and detrimental headwinds. These stocks have a history of outperforming most gold producers, regardless of their size, even in the steepest bear and bull markets.

They’re called royalty companies.

And right now, these stocks could provide enormous profits for gold investors over the next decade.

Let us explain…

The key to royalty companies is that they do NOT operate mines. They don’t put their boots on the ground, they don’t have thousands of employees… and most importantly, they are not riddled with sky-high or unexpected expenses that all miners face.

Instead, these are simply financing companies. They exist to bankroll mining projects. Think of them as startup accelerators or incubators. These companies make upfront payments to mining companies that need funding. In return, the royalty companies get a piece of the production income once operations launch. Better yet, most royalty contracts cover the entire lifetime of the mine. That means these companies will still get paid years after gold production comes into fruition.

Unlike mining in general, royalty companies have one of the best business models in the world.

If anything unexpected happens to the mine, it’s the mining company that has to deal with the associated costs – not the royalty financing company.

Aside from the initial upfront payment, the downside risk for royalty firms is next to nothing. No exploration costs, no capital expense overruns, no fixed costs… yet they reap the benefits of favorable commodity prices and production rates and even new drilling campaigns.

Additionally, these companies are vastly diversified. Most premier royalty businesses have their cards stacked among several projects, which reduces project-specific risk. If something goes AWOL on one asset, there are still plenty of growth opportunities from their other assets.

Gold Royalties in Action

To highlight the power of gold royalty companies, let’s take a look at a successful example.

The modern concept of royalty companies was first introduced in 1986 by the legendary Pierre Lassonde and Seymour Schulich of Franco Nevada (which we will further discuss below).

In 1986, Franco Nevada Mining, looking to copy the success of the royalty model in the oil & gas industry, made a significant move by providing an upfront payment of $2 million for the royalties of the Goldstrike Mine in Nevada. At the time, the mine was estimated to have around 500,000 ounces of gold in the ground.

By 2020, the mine (which has since been purchased by Barrick Gold) has generated close to $1 billion in royalty payments to Franco Nevada, representing a nearly 50,000% return on investment, with potential for more.

Top Royalty Stocks

With the anticipation of another gold bull market, the following gold royalty companies have been quietly building up their portfolios.