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Barrick Gold Corporation (USA) (ABX), Royal Gold, Inc (USA) (RGLD): Could This Royalty Company Turn It Around in 2013?

Shares of Royal Gold, Inc USA) (NASDAQ:RGLD), much like many other gold stocks, haven’t performed well during 2013 (up to

Higher dependency on gold
date) as they tumbled by more than 35%. Nonetheless, Royal Gold’s business model is different than other gold companies as it relies on royalty payments from precious metal miners; this type of business model lowers the company’s risk compared to the risk that gold producers face. Will Royal Gold’s business model pull up the company’s stock in the remainder of 2013?

Barrick Gold Corporation (USA) (NYSE:ABX)

One of the main factors that affect the company’s revenue growth and profits is the price of gold. Revenue from gold royalties accounted for nearly 73% of the company’s revenue in the first quarter of 2013. In comparison, in the first quarter of 2012 gold sales accounted for only 64% out of total revenue. This means the company’s dependency on gold has risen so that if gold prices don’t increase, Royal Gold, Inc USA) (NASDAQ:RGLD)’s profitability will dwindle. The higher dependency on gold is making Royal Gold a better gold investment for those who wish to increase their gold exposure.

Gold price is falling

The price of gold in the first quarter of 2013 fell by 3.5% (year-over-year). The table below summarizes the changes in precious metal prices.

Moreover, since the beginning of the month, gold prices tumbled by more than 8.5%. One of the driving forces behind the recent drop in prices was thelatest FOMC meetingin which the Fed chairman hinted that the Fed may taper QE3 in the coming months. This will lower the growth in the U.S’ money base and thus lower the chances of a sudden rise in inflation.

This drop in prices has already adversely affected Royal Gold, Inc USA) (NASDAQ:RGLD)’s profit margin as it fell from 61.6% in the first quarter of 2012 to 57.9% in the first quarter of 2013. Moreover, in recent months the price of gold fell and is currently at $1,365 oz. Based on current available data, in the second quarter of 2013, the price of gold is around $1,441, which is 10.6% lower than the average price in the second quarter of 2012. This means, assuming all things equal, the company’s profitability could decline by an additional five-to-six percentage points.

Production is falling

Despite the rise in revenue in the first quarter of 2013, production in gold by the company’s operators fell by nearly 3% (year-over-year). Moreover, the production of many other precious metals including silver fell during the first quarter. The table below summarizes these findings.