Royal Gold (RGLD) expects to grow earnings through its gold mining projects in Canada and Chile in a way that is not dependent on the price of gold. Garrett S. Nelson, Vice President at BB&T Capital Markets, rates this miner a “buy,” and he says pullbacks in the price of gold present investors with a more attractive entry point, especially as developed nations continue increasing their money supply.
“Royal Gold is poised to realize extraordinary earnings growth over the next few years with the impending start up of a couple of mines in which they have very large royalty interests — Thompson Creek’s Mt. Milligan mine in Canada and Barrick Gold’s (ABX) Pascua-Lama mine in Chile. Importantly, this earnings growth is not dependent on gold prices, although higher gold prices would certainly help produce additional royalty revenue and act as an additional tailwind for the stock — the growth is driven by volume and the incremental royalties they’ll collect when those two mines start up,” Nelson said.
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Nelson says RGLD has very low overhead, with less than two dozen employees, allowing the company to generate EBITDA margins greater than 90%. He adds that management has a track record of successful favorable and accretive royalty agreements.
“The cash flows from Mt. Milligan and Pascua-Lama should help fund additional royalty agreements and dividend increases down the road. The stock is down from a 52-week high of just over $100 to levels where the valuation is very attractive. Also, historically this is a stock that’s outperformed both physical gold prices and senior gold producer equities by a wide margin, so we view RGLD as the best way to play gold that’s available to investors,” Nelson said.
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