Saturday, November 6, 2021

Royal Gold, Inc. (RGLD)

We mentioned Royal Gold in our post last October, What I Would Buy Instead of Tesla

Royal Gold (RGLD) for $7.9 billion. A great business model - streaming/royalty interests on gold mines with no debt. Net income of $200 million for the past year is expensive, but it could/should grow as more mines come into production. (They have interests in 41 producing mines and 16 in development, plus more in the pipeline.) They do about 1 transaction a year but it's lumpy - they did none from 2006-2008 or from 2016-2018.
The shares are down subsequently and the market capitalization is now $6.9 billion. The company has no net debt, so the enterprise value is the same or less. Streaming and royalty revenue was up significantly in Q3 2021 vs Q3 2020, even with lower gold and silver prices:
For the quarter ended September 30, 2021, we recognized total revenue of $174.4 million, comprised of stream revenue of $115.9 million and royalty revenue of $58.5 million at an average gold price of $1,790 per ounce, an average silver price of $24.36 per ounce and an average copper price of $4.25 per pound. This is compared to total revenue of $146.9 million for the three months ended September 30, 2020, comprised of stream revenue of $106.5 million and royalty revenue of $40.4 million, at an average gold price of $1,909 per ounce, an average silver price of $24.26 per ounce and an average copper price of $2.96 per pound.

If you annualize the quarterly operating cash flow of $130 million, that's $520 million, a 7.5% cash flow yield on the enterprise value. From the Q3 conference call:

We also had record volume of 97,400 gold equivalent ounces, or GEOs, which was a 27% increase over the prior year period. As metal prices are mixed, most of the increase in our revenue was driven by strong operating performances, as Mark mentioned in his remarks.

It is strange that cryptocurrencies are doing so well and gold is doing so poorly. It is also strange that the unprofitable Robinhood bubble basket keeps rising, from $1.6 trillion of combined market capitalization last year to $2.2 trillion today. For the same price as that basket, you could own:

  • All three of the Canadian oil majors, $113 billion
  • The entire tobacco industry (PM, MO, BTI, TPB, SWMAY, IMBBY, JAPAY), $380 billion
  • A huge proportion of the North American pipeline industry; all of the top ten holdings of the Tortoise Midstream CEF (ENB, MMP, EPD, WMB, MPLX, ET, KMI, TGRP, OKE, DCP, WES) for $334 billion.
  • The better part of the world auto industry (TM, Subaru, VW, F, GM) for $578 billion.
  • Berkshire Hathaway for $650 billion.
  • With the remaining $150 billion you could buy most of the gold mining industry (NEM, GOLD, FNV, SBSW, RGLD, GFI, AU, KGC) for $150 billion.

That is $2.2 trillion in combined market capitalization, the same as the 19 Robinhood stocks. Most of the mispricing of the Robinhood basket is coming from Tesla ($1.3 trillion), but there is a significant amount of market capitalization ($320 billion) in Zoom, Uber, Doordash, Carvana, Peloton, Beyond Meat, and Nikola, which are very poor quality, overvalued businesses.

A bubble in poor quality hype businesses and 13,000 gambling tokens while at the same time entire industries that return cash to shareholders are being neglected is evidence to support Lyall Taylor's redemption and liquidity flywheel hypothesis [See: 1, 2]. The very end of a secular trend in growth vs value is a crescendo of selling in some areas (that creates the "value") and buying in the other areas (momentum ones, which become very overvalued)!

Two Updates


1 comment:

Anonymous said...

Great post penny loafer. Love the chart on Gold adjusted for money supply.