Thursday, October 15, 2020

A Small Cap Equity holding: Royal Gold Inc. (RGLD, $124.74): “As Good as Gold” by: Johnny Nick, AIM Student at Marquette University

 Royal Gold Inc. (RGLD, $124.74): “As Good as Gold”

By: Johnny Nick, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


• Royal Gold Inc. (NYSE:RGLD) engages in the acquisition and management of metal streams, royalties, and similar interests. 

• Despite production disruptions at RGLD’s principal operating locations, in FY 2020 (June) RGLD set records for revenue, operating cash flow, and earnings due to the sharp increase in gold and silver prices. 

• Management has prioritized volume expansion at RGLD’s operating locations with increased capital expenditures to ensure future revenue growth regardless of metal prices. 

Key points: 

Royal Gold Inc. partners with capable operators, and in exchange for future metal streams and royalties, RGLD offers them financing for activities such as the development and construction of a mine, mine expansion, or funding exploration work. As you might imagine, RGLD’s performance is strongly tied to the market price of metals, especially the price of gold as gold accounted for 79% of FY 2020 revenue. Fortunately for RGLD, due to the uncertainty in the market from the COVID-19 pandemic, as well as from the fear of inflation caused by significant Federal Reserve spending, the average per-ounce selling price of gold increased by 30.7% for RGLD from FY19-FY20. As a result of this macro-environment, Royal Gold Inc. posted record revenue ($498.8 million), operating cash flow ($340.8 million), and earnings ($199.3 million) at their fiscal year end on June 30th 2020, despite the fact that its principal operating properties produced 8% less ore than in 2019 due to Covid-19-related production restrictions. 

This stock was pitched May 1st of this year. The thesis behind this stock recommendation was that RGLD be used as a hedge for the AIM Small Cap Domestic portfolio due to its strong tie to Gold and subsequently low beta in the face of market uncertainty. Additionally, RGLD’s superior operational efficiency and potential for robust volume growth offered our portfolio significant upside potential. I believe this thesis still holds true in both aspects. Today, there remains a great deal of uncertainty as we face a contentious upcoming election and confusion surrounding the reopening of the economy in midst of the pandemic. The VIX, a measure of market volatility, is currently increased at 26.85 which is 50.8% higher than its 17.8 historic average according to JP Morgan’s Market Insight. In a commitment to future growth, RGLD management has decided to capitalize on their strong cash flows by spending approximately $136 million this year in advanced payments towards future silver streams from the Khoemacau mine project. Investments like this increase future volume capacity making RGLD less reliant on the market prices of precious metals. 

What has the stock done lately?

When the market took a sharp decline in March 2020, RGLD hit its low of $69.64. Since then its stock price steadily climbed until it hit its high of $145.33 on August 5, 2020. It is no coincidence that gold also hit its ceiling of $2051.50 a day later. These inflection points are likely due to an overall boost in equities. Both RGLD and the market price of gold have since dropped to around $124 and $1900 respectively, where they remain today. 

Past Year Performance: Over the past year, RGLD has decreased a mere 0.21% from $125.00 to $124.74. However, RGLD’s Price to Earnings ratio(P/E) has decreased from 62.9x to 42.9x as the company proves it value. The S&P 500’s P/E has increased from 21.75x to 26.65x over the same period. As a result, RGLD is relatively cheap compared to the when we first purchased it.

Source: FactSet

My Takeaway

Despite a slightly negative return for our portfolio since being added, I believe the original thesis holds true as Royal Gold Inc offers a unique hedging opportunity for our portfolio in a time of extreme uncertainty. Additionally, RGLD boasts a diversified portfolio of metal streams and royalties and continues to aggressively expand upon their contractual agreements. With this thesis in mind as well as the relatively cheap price of RGLD due to its low P/E I believe this stock is a good hold for our portfolio. 

Source: FactSet