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 golddate) 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?
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.
In 2013, the company estimates its operators’ gold production will decline by roughly 12% compared to 2012. Royal Gold’s acquisition of part of the Mt. Milligan copper-gold project back at the end of 2012 won’t be enough to augment its revenue from gold in 2013. Thus, the expected drop in production of gold and the decline in gold price is likely to further pull back the company’s revenue growth and bring down its profit margin in the coming quarters.
Despite the expected decline in revenue and profitability, Royal Gold, Inc USA) (NASDAQ:RGLD) is still a solid investment for those who wish to expose their portfolio to gold.
Advantage over gold producers
The main advantage the company has over leading gold producers such as Goldcorp Inc. (USA) (NYSE:GG) and Barrick Gold Corporation (USA) (NYSE:ABX) is that its level of risk is much lower. Royal Gold’s business model is based on royalty payments so that it doesn’t deal with rising costs of production. The recent dip in the price of gold to below $1,300 puts gold producers at higher risk since mining costs continue to increase: Barrick’s expected cost of production for 2013 will range between $1,000 and $1,100.
Goldcorp’s total cash cost reached $874 in 2012 and may reach above $1,000 in 2013. This means the profit margins of these companies will decline substantially in the coming months. Royal Gold’s operating profit margin is much higher than gold producers’: In the first quarter of 2013, Royal Gold’s profitability was approximately 0.6. In comparison, Goldcorp’s profitability was 0.3; Barrick’s, 0.4.
Moreover, Royal Gold’s financial risk is lower than some gold producers: Royal Gold, Inc USA) (NASDAQ:RGLD)’s debt-to-equity ratio is only 0.1; Barrick’s debt-to-equity ratio is 0.6.
The lower operational and financial risk of Royal Gold compared to gold producers puts the company as a less risky investment
Advantage over gold ETF
Royal Gold is also a better option than holding SPDR Gold Trust (ETF) (NYSEARCA:GLD) ETF because unlike SPDR Gold Trust, Royal Gold offers dividend payment. The current dividend comes to an annual yield of 1.5%. Further, holders of SPDR Gold Trust are required to pay an annual fee of 0.5%. The sharp drop in demand for gold has also reflected in the plunge in SPDR Gold’s holdings of gold: Since the beginning of the month, the trust’s gold holdings fell by nearly 4.3% and since the beginning of the year by nearly by 28%.
Looking forward
Royal Gold, Inc USA) (NASDAQ:RGLD)’s revenue and profit margins are likely to further decline in the coming months, which will bring down the company’s stock. If the price of gold drops further, the company’s stock is likely to follow. The high profit margin the company has may decline but will remain high. This will keep the company paying dividends even if the price of gold falls further. Therefore, if you still wish to expose your portfolio to gold, this company might be your best bet.
For further reading: Will Gold Continue to Dwindle?
Lior Cohen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Could This Royalty Company Turn It Around in 2013? originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
