Mining Royalties: How to Claim Your Share of
the World's Most Profitable Gold Mines
1
G&G Investment Society
Copyright © by G&G Associates
Published by: G&G Associates
G&G Associates
Client Services: 757-251-0174
[email protected]
Our mission is to empower investors and consumers with unbiased information and advice
to keep them in the know to protect their savings, build their wealth and prosper in good
times and bad to pass an inheritance to their children’s…children.
All rights reserved. The accuracy of the data used is deemed reliable but not guaranteed. There’s no assurance the
past performance of these, or any other recommendation, will be repeated in the future.
2
America's Most Guarded Retirement Secret
I first learned about the power of the investing tool called mining royalties in the summer of
2007, when I heard about the prolific gold-mining region in the U.S., the Carlin Trend...
From the air, the north end of the Carlin trend looks like a suburban housing development –
of gold mines. Most of the mines dotting this region are simply huge holes in the ground –
called open-pit mines – but several of the richest mines follow the ore bodies nearly a halfmile underground.
The Leeville Mining Complex, owned by mining giant Newmont Mining, contains one such
underground mine. It's part of a huge cluster of mines located on the north end of the Carlin
Trend. It was in the Leeville complex that I traveled thousands of feet below ground as part
of my research into "Nevada Royalties."
The mine, West Leeville, should produce about 400,000 ounces per year for six to eight
years... and provide a revenue stream of about $300 million to $450 million at today's gold
prices. While Newmont technically owns this stream of gold, another company – central to
the mining royalty program – gets a steady paycheck from that production...
You see, if Nevada were a sovereign nation, it would be the world's third-largest gold
producer. The state produced 6.3 million ounces last year, 78% of U.S. gold production, and
12% of the world's production. The heart of Nevada gold production is the Carlin Trend,
which produced more than 50 million ounces since the 1960s.
While Nevada's mining riches are old news to many investors, not one in 1,000 knows how
mining royalties fueled the industry's development … Quite simply, a few companies have
figured out how to virtually eliminate the litany of risks associated with mining and
exploration. They control vast reserves and pocket steadily increasing revenue streams…
while letting other companies bear the costs and risks of actually producing that gold.
You can participate immediately with just a few clicks with your online broker. And in this
report, I've identified the best company to buy that will give you a safe and
diversified way to participate in the bull market in gold... without risking it all on one
big strike, worrying about rising production costs, or any other concerns of your average
gold-stock investor.
As this company's royalty income grows and the price of gold escalates, its shares will
absolutely rocket higher.
In short, I think this is the ideal gold investment to put in your retirement account and
forget about for years. I'll get to the specifics of this mining royalty in just a moment, but
first let me tell you how the gold royalty business works.
How You Can Get Rich with Gold and Silver Royalties
Building a large gold mine is usually a messy, expensive business.
First, you have to pay geologists to scour the Earth in search of prospective ore bodies – but
that's only after paying governments the proper permitting and licensing fees.
3
Let's say you find a large body of ore after
punching hundreds (and often thousands) of
exploratory drill holes into the Earth. Now
you have to spend millions on mine
infrastructure. This includes roads, mine
shafts, electricity, and a smelter. In
Newmont's case with the West Leeville mine,
it took six years and hundreds of millions of
dollars to get it up and running.
Royalty Structures Vary
As you research royalties, you will find a
dizzying array of legal structures.
Typically, the royalty holder is not
responsible for capital or operating costs.
However, as with any contract, the value
of the royalty lies in the details, which can
vary greatly.
One way a producer offsets that cost is by
selling a small royalty for the life of the mine.
In general, a royalty is simply the right to
receive a portion of a mineral resource. It
could be oil, gold, copper, or any other
commodity.
Here are the common types of royalties:
Fixed-Rate Royalty – royalty rate (%)
does not change through time.
Gross Smelter Return (GSR) – a
percentage of the gross volume of metal
produced at the smelter. This royalty is
paid before mining costs are taken out.
The mining company gets a lump-sum
payment up front, and the royalty investor
gets a paycheck for the life of the mine. A
royalty company may make hundreds of
small investments to spread its risk and even
out future payments.
Gross Proceeds Return (GPR) – a
royalty in which payments are made on
contained ounces, rather than what's
recovered at the smelter.
The royalty business is, at its core, an
intellectual business. The company's
management must have the geologist's
ability to tell a good mine from a bad. It has
to have the financier's ability to structure
deals that offer the most benefit to both
sides of the royalty... and it has to know
when the time is right to raise additional
capital it can deploy to benefit shareholders.
Net Profits Interest (NPI) – a royalty
based on the net profit from a mine. That
means the royalty doesn't begin until the
company recovers the costs for building
the mine.
Net Smelter Return (NSR) – the most
common form of royalty in mining. The
royalty is a percentage of the volume of
metal produced at the smelter, after the
company recovers costs of transportation,
refining, and smelting.
That means we want to know as much about
the management and directors of our royalty
companies as possible, and it's why we
require a proven track record of success with
our royalty investments. Investing with the
right people is directly responsible for our
success. However, once we find the right royalty managers, we get to invest in projects
screened by the best in the industry.
The best royalty investment you can make right now is Royal Gold
(Nasdaq: RGLD).
Royal Gold – The King of Mining Royalties
Royal Gold, the largest gold royalty company in North America, began in 1981 as
Royal Resources, an oil and gas company. When oil prices slumped in the mid-1980s,
4
the company shifted its focus to gold.
Over the past 20 years, Royal Gold has made itself the leading gold royalty company,
with much of its success built on the royalties it derives from the open-pit Pipeline
Mining Complex in Nevada. The Cortez Joint Venture, a pairing of the world's largest
gold company Barrick Gold and a Rio Tinto subsidiary, operates Pipeline.
Today, the company holds 26 producing royalties, 19 in development, and another
117 that are still under exploration. Royal Gold holds six producing royalties in
Nevada and ten total. Here's a list of its producing royalties:
Name
Gold Reserves
Royalty
Location
Goldstrike
5.8m oz.
0.9% NSR
Nevada
Leeville Mining Complex
2.5m oz.
1.8% NSR
Nevada
Cortez Joint Venture/Pipeline
7.9m oz.
0.4%-5.0%
GSR
Nevada
Bald Mountain
720,000 oz.
1.8%-3.5%
NSR
Nevada
Robinson (gold/copper)
905,000
oz./1.5b lbs.
3% NSR
Nevada
80,000 oz.
2.0% GPR
Nevada
300,000 oz.
0.0%-2.0%
NSR
S. Dakota
N/A
Sliding Scale
Canada
752,000 oz.
0.72% NSR
Canada
1.6b lbs./930m
lbs/8m lbs.
2.7% NSR
Canada
913,000 oz.
2.0%-4.0%
NSR
Mexico
2.1m oz.
1.0%-5.0%
NSR
Mexico
Dolores (gold/silver)
2.4m oz./127m
oz.
1.25%-2.0%
NSR
Mexico
Penasquito (gold/ silver)
17.4m oz./1.0b
oz.
2.0% NSR
Mexico
174,000 oz.
3.0% NSR
Mexico
60,000 oz.
3.0% NSR
Bolivia
284,000 oz.
1.0%-3.0%
NSR
Chile
Martha (silver)
2.8m oz.
2.0% NSR
Argentina
Mt. Goode (nickel)
101m lbs.
1.5% NSR
Australia
Balcooma (gold, silver, copper,
lead, & zinc)
1.7m oz.
1.5% NSR
Australia
Gwalia Deeps
2.0m oz.
1.5% NSR
Australia
Twin Creeks
Wharf
Allan (potash)
Williams
Voisey's Bay
(nickel/copper/cobalt)
El Chanate
Mulatos
El Limon
Don Mario
El Toqui (gold/silver)
5
Southern Cross
Siguiri
Taparko
Johnson Camp (copper)
Las Cruces (copper)
591,000 oz.
1.5% NSR
Australia
3.3m oz.
0%-1.9%
NSR
Africa
800,000 oz.
0%-15% GSR
Africa
492m lbs.
2.5% NSR
Arizona
2.4b lbs
1.5% NSR
Spain
Royal Gold has its roots in Nevada mines for a reason. The CEO, Tony Jensen, was
the mine general manager of the Cortez Joint Venture. Clearly, Tony realized what a
fantastic asset it had at the Pipeline mine and acquired the royalty as part of his new
company.
Jensen also worked as a mining engineer for giant miner Placer Dome for 18 years
before it was acquired by Barrick Gold. As an alumnus of the Carlin and Cortez Trends
in Nevada, he knows their value. These are huge projects with long mine lives –
which means that the capital costs are paid off long before the mine stops producing
gold.
In addition to Royal Gold's stable of productive mines, Jensen has put together a
great royalty portfolio of developmental projects with the best large mining
companies in the world. Although these sites aren't generating gold yet, as they
come on line, they'll turbocharge Royal Gold's revenue stream and... as I'll explain in
a moment... they represent the source of our huge gains.
6
In July 2007, Royal Gold acquired another
precious metals royalty company, Battle
Mountain Gold Exploration Corp. The
addition of Battle Mountain brought 13
royalties projects in the Americas (in
addition to those listed in the table below)
– four producing and two near-term
development stage projects. The jewel in
the acquisition is the Dolores project in
Chihuahua, Mexico.
Royalties Are Nothing New
Building a business around royalties
is not a new idea. Horace "Silver
Dollar" Tabor made millions from
royalties.
In 1877, Horace and his wife moved
to Leadville, Colorado, to run the
town's general store. Broke
prospectors would wander in, and
Tabor would sell them supplies for a
"grubstake."
Minefinders, the operators of Dolores,
achieved first production from the mine in
May 2009. The mine holds 2.4 million
ounces of gold reserves and 126 million
ounces of silver reserves. The cash cost of
producing the gold is around $300 per
ounce of gold for the life of the mine. At
the current gold price, the Dolores royalty
will pay a little more than $5 million per
year for about 12 years.
A grubstake is a royalty ownership
of anything the prospectors found.
Grubstaking allowed Tabor to
participate in many small projects,
and minimized his risks.
On May 3, 1878, Tabor's grubstaking
Royal Gold's recent transaction with Teck
strategy paid off. Two miners Tabor
Resources, due to close January 29, 2010,
supported discovered a deposit that
looks even better. The company paid
became the Little Pittsburg mine.
$218 million cash and 1.2 million shares
The Little Pittsburg was so rich in
for 75% of the gold produced at
silver that it started the Colorado
Andacollo. (The mine's primary product is
Silver Boom.
copper, so Teck is happy to sell the gold
stream.) Once Royal Gold receives
Tabor eventually sold his stake in
910,000 ounces, the royalty drops to 50%
the Little Pittsburg for $1 million, a
of the gold. So Royal Gold bought that
huge sum in the late 1800s.
first 910,000 ounces of gold for about
$330 per ounce. And the deal should
produce about $36 million per year for 20 years... that's a spectacular deal.
Royal Gold's other recent transaction is just as impressive. The company bought rival
royalty company International Royalty for about $749 million in cash and shares. The
acquisition dramatically expands and diversifies Royal Gold's portfolio by adding 85
new royalties on 40 projects. It immediately provides new revenue from royalties on
11 producing mines.
The jewel in this deal is a 2.7% NSR on the Voisey's Bay nickel mine. Royal Gold's
share of production in 2009 was 138.2 million pounds of nickel, 68.2 pounds of
copper, and 6.7 million pounds of cobalt. That royalty alone could pay for this deal.
Voisey's Bay mine contains more than 100 million tons of nickel... about 27 years of
mine life.
Planning for the Future
Royal Gold has three other projects in development that will add significant value to
7
its shares. The first is Goldcorp's Peñasquito project in Zacatecas, Mexico. This
project reflects Royal Gold's expertise in identifying and acquiring top-tier projects.
Goldcorp estimates that Peñasquito will produce 400,000 ounces of gold, 31 million
ounces of silver, 417 million pounds of zinc, and 214 pounds of lead per year. That's
the equivalent in value of 1.7 million ounces of gold per year. At the current gold
price, this royalty should bring in more than $3.6 million per year at peak production.
Royal Gold bought a 2% net smelter royalty on the project for $80 million in cash and
577,434 shares of stock. The deposit is one of the world's largest silver, gold, and
zinc reserves.
The second project is the Canadian Malartic project, run by Osisko. It is located in the
Abitibi Gold Belt in Quebec. The current proven and probable reserves are 6.3 million
ounces of gold. The project should go into production in 2011 and generate $6 million
in cash for Royal Gold for 10 years.
The third project is Barrick's Pascua-Lama, on the border between Argentina and
Chile. Once completed, it should produce between 750,000 and 775,000 ounces of
gold per year for 23 years. Royal Gold acquired a net smelter royalty on the project
for $20.5 million in March 2007. The royalty is on a sliding scale, but would be worth
1.08% at current gold prices.
This giant project holds reserves of 17 million ounces of gold, 689 million ounces of
silver, and 565 million pounds of copper. If you take the copper and silver into
account, the cost of producing the gold will be between $40 and $50 per ounce.
Barrick anticipates production this year. At peak production and the current gold
price, this royalty should produce more than $6 million per year in revenues.
These royalties are exceptional because of the companies running the
projects (Goldcorp and Barrick are the Chevron and ExxonMobil of the gold
mining world). We know the mines will go into production, and Royal Gold's
royalty stream will swell. All we need now is patience...
The Financials of Royal Gold
Royal Gold's management clearly states its goal: avoid responsibility.
For running mines, that is. The company is quite responsible for vetting royalties and
only buying the highest quality. That model produced a double-digit return on
invested capital per year for the last five years. That's a mutual-fund manager's
dream track record.
Over that same five years, the company's operating income averaged 55% and net
profit averaged 42%. Those are numbers to make any management team proud.
That translated into a banner year in 2009. Royal Gold increased its revenue by 11%,
its net income by 59%, and the value of its royalty interests by 52%. Royal Gold was
one of, if not the only company, immune to the recession. As CEO Tony Jensen said:
"While companies both inside and outside of the mining community faced
unprecedented economic challenges due to the severe global recession, Royal Gold
8
recorded its best year ever with record revenue and cash flow."
Those numbers are astonishing. Few companies are run so efficiently that 52% of its
revenue converts to net income. While some of that cash goes to acquisition, some of
it goes back to shareholders.
That's the power of the royalty business. The company's assets aren't spent on
expensive exploration or drilling programs. The main cost for a royalty company
is in the research because understanding the risk and the potential –
whether buying a royalty for $2 million will be worthwhile – is the entire
game.
Over the last few years, Royal Gold's strategy resulted in enormous, incredible
growth. At the end of 2007 Royal Gold was a middle-size company, with a market cap
of $812 million. It had $90 million in cash and $11 million in royalty receivables, for a
total of $101 million in liquid assets. It owed about $15 million in debt.
Today, Royal Gold is a $2.1 billion company with more than $316 million in cash. The
company will return more than $14 million to shareholders in dividends. In November
2009, the company raised its dividend by 38% to 36¢ per share.
2009
2008
2007
2006
2005
Revenue
$73.8
Million
$66.3
Million
$48.4
Million
$28.4
Million
$25.3
Million
Net Income
$38.4
Million
$24.0
Million
$19.7
Million
$11.3
Million
$11.5
Million
52%
36%
41%
40%
45%
Profit Margin
How Do We Profit?
Royal Gold was among the best-performing stocks over the last 20 years, thanks to a
general rise in gold prices.
In 1992, shares of Royal Gold traded for a measly 3¢ per share. By September 1996,
they rose to $14.25... an increase of 47,400% in just four years. Gold rose just 21%
over that period.
In 2001, Royal Gold shares languished down around $2.50 per share. By the end of
2009, shares hit a high of $55.74... that's a 2,130% gain. The price of gold rose
364% over that same period.
The total gain in Royal Gold shares from its trough 1992 to its recent high is an
astonishing 178,933%. That means every $1,000 invested in 1992, is worth about
$1.8 million today.
The price of gold rose 358% over that period. The rising gold price and the leverage
Royal Gold's royalties offer on the gold price are directly responsible for those
enormous gains. As Royal Gold executed its business model, the rising gold price
made its assets more and more valuable.
9
While I doubt our percent gains on Royal Gold will hit six digits over the next 16
years, it will continue to treat its investors very well. The value of Royal Gold's royalty
stream can grow in three different ways. None of them cost the company another
cent.
First, the mines' reserves grow. It's common for a mine to "find" new reserves as it
grows. For example, let's go back to Goldcorp's Peñasquito project. In 2006, when
Royal Gold bought the royalty, the mine had 10 million ounces of gold reserves. It
currently holds 17.4 million ounces. That makes the royalty much more valuable
simply through the organic growth of the mine. Royal Gold didn't pay any more
money for those additional ounces.
The second way our investment grows is through the "minor" leagues. Royal Gold
holds royalties on nearly 100 nonproducing projects at various stages. Those royalties
are already paid for, we're just waiting to see which ones become mines. With gold
prices north of $1,000, the mining companies have plenty of incentive to turn a good
number of them into mines than they did even a year ago.
By 2011, five new mines will go into production: Dolores, Andacollo, Holt, Peñasquito,
and Canadian Malartic. Those projects add around $77 million in new sales revenues.
That puts Royal Gold's revenues at $160 million next year. Each one that goes into
production makes Royal Gold more valuable... much more valuable. That's because
royalty cash flows are extremely profitable.
Royal Gold earned $35 million in royalty revenue last quarter. That works out to be
$140 million for all of 2010.
The company will add revenue from Peñasquito (Goldcorp's giant new mine) this
year. It's already producing gold. When it's fully online, it will add $36 million to
Royal Gold's revenues.
In January, Royal Gold closed a deal with Teck Resources for a royalty its Andacollo
gold and copper mine. Doody estimates this royalty will be worth 40,000 ounces of
gold... or $44 million.
On top of that, you add the $46 million in annual revenue International Royalty Corp.
brought on board. That all adds up to $266 million in royalty revenues next year
Now, we need to talk about valuation.
Over the last seven years, the market paid anywhere from 13 times to 38 times
Royal Gold's royalty revenues. The average value was 20 times. Let's be conservative
and use 17 times revenue. If you multiply 17 by $266 million in revenue, you get a
market value of $4.5 billion in market value.
Royal Gold has 42.2 million outstanding shares... at $4.5 billion market cap, that
equates to a $106 share price.
That's 135% above its current price. And that's if gold prices are flat.
10
But what happens if the price of gold goes up?
Royal Gold's share price fluctuates with the price of gold. I worked backwards,
comparing its price per ounce of reserves to the price of gold since 2003. The data's
conservative trend shows that a change of $100 in the price of gold changed the
value of Royal Gold's reserves by $3.12 on average. That changed the share price by
about $5. That has huge implications for our future gains.
If the dollar continues to fall and the price of gold continues to climb, our returns
from Royal Gold are enormous. By that calculation, when gold hits $1,500 per ounce,
Royal Gold shares should hit $69 per share. That's roughly a 40% gain from here.
That's the conservative trend... If you look at average numbers, the outlook is even
more enticing.
The average trend through the data showed something far more dramatic. It showed
that a change of $100 in the price of gold changed the value of Royal Gold's reserves
by $5. That changed the share price by about $9.
At that multiple, a gold price of $1,500 should equate to a share price of $110... a
118% gain from here.
If any one of those three factors – growth, acquisition, and rising gold price – work
out, our investment will grow. If all three occur, we'll continue to see rapid, tripledigit growth in the share price.
It's clear from its history and our projections, Royal Gold's strategy is working. While
we don't receive royalty checks, our investment grows in value through the
company's royalties.
The company's best path for growth (and for our investment) lays in its existing
strategy. Mining companies need cash to develop new projects and Royal Gold has a
steady flow of cash to invest. That's what makes Royal Gold such a great
investment...if you don't pay too much for it.
How to Buy Royal Gold
Royal Gold will post capital gains for investors this year, how much will depend on
when you buy it. The key to buying Royal Gold shares is in the same relationship
between its price per reserves and the price of gold.
That simple formula solves a fundamental problem for investors – how to figure out
what the company is worth. Royal Gold's business model is great for the company,
but can pose a problem for investors. It's hard to figure out a fair value. That's
because it involves two moving parts: the share price and the gold price. If we dig
back 10 years, we find that, on average, an ounce of bullion gold trades for about 30
times the price of an ounce of Royal Gold's reserves. The five-year average was 29
times.
That's an important number because once we know the average, we can figure out
the fair value of Royal Gold's share price. You see, Royal Gold carries no debt and has
11
about $200 million in cash. Plus, as I said, its business is very simple – all it does is
collect gold ounces from the mines.
This table shows exactly how much you should pay for Royal Gold's shares,
depending on the price of gold. Here's how it works... Royal Gold's shares currently
trade for $50, and gold trades for $1,365 an ounce. Let's consult the table.
Gold Price
MV/Oz
Share Price
$1,500
$1,164
$58.21
$1,475
$1,155
$57.73
$1,450
$1,145
$57.24
$1,425
$1,135
$56.76
$1,400
$1,125
$56.27
$1,375
$1,116
$55.79
$1,350
$1,106
$55.31
$1,325
$1,096
$54.82
$1,300
$1,087
$54.34
$1,275
$1,077
$53.85
$1,250
$1,067
$53.37
$1,225
$1,058
$52.88
$1,200
$1,048
$52.40
$1,175
$1,038
$51.91
$1,150
$1,029
$51.43
$1,125
$1,019
$50.95
$1,100
$1,009
$50.46
$1,075
$1,000
$49.98
$1,050
$990
$49.49
$1,025
$980
$49.01
$1,000
$970
$48.52
$975
$961
$48.04
$950
$951
$47.56
$925
$941
$47.07
$900
$932
$46.59
$875
$922
$46.10
$850
$912
$45.62
$825
$903
$45.13
$800
$893
$44.65
$775
$883
$44.16
$750
$874
$43.68
12
At between $1,350 and $1,375 per ounce, the fair value for Royal Gold shares would
be $55.31. Since the current share price is around $50, we can buy. It's not exact,
but the table above will provide you with a nice rule of thumb for the value of Royal
Gold shares.
Recommendation: Buy Royal Gold (Nasdaq: RGLD) shares when it is below
its fair value, based on the chart above. Use a 25% trailing stop.
Published by G&G Associates Investment Research.
G&G Associates welcomes comments or suggestions at [email protected]. This address is for feedback only. For
questions about your account or to set up a personal consultation, call 757-251-0174 Or e-mail [email protected].
© 2010 G&G Associates Investment Research. All rights reserved. Any reproduction, copying, or redistribution, in
whole or in part, is prohibited without written permission from G&G Associates, P.O. Box 69082, Hampton, VA 23669
or www.gngassociates.net.
This work is based on SEC filings, current events, interviews, corporate press releases, and what we've learned as
financial journalists. It may contain errors, and you shouldn't make any investment decision based solely on what you
read here. It's your money and your responsibility.
13