Savings Experiment: Snow Removal
Why Your 2012 Tax Bill May Jump By $8,000"Stocks are so low that the best are bound to attract bargain-hunters ... eventually," says Timothy Lutts. One such value he highlights in The Cabot Stock of the Month Report is Royal Gold (NASDAQ: RGLD).
He explains, "Royal Gold doesn't own any gold mines. It doesn't mine gold. It doesn't buy gold. And it doesn't sell gold. It simply owns the rights to royalties from a variety of precious metals producers."
"The major benefit of Royal Gold's approach to the gold business is that it involves no capital costs, no operating costs and no legal or environmental liabilities. The major drawback? Well, we haven't found it yet.
"Royal Gold is not large. It has annual revenues of just $69 million and 34 million shares outstanding. However, Royal Gold is the biggest company in the world that derives its revenues solely from precious metal royalties.
"It has royalty interests in producing mines in 25 locations in the U.S., Canada, Mexico, Argentina, Bolivia, Nicaragua and West Africa. In addition, it has royalty interests in seven development stage mines and royalty interests in 24 evaluation stage projects.
"What is a royalty interest? Basically, it entitles the company to a portion of the revenues from a project. There are a variety of royalty structures; the most common include gross smelter return royalty, net profits interest royalty, net smelter return royalty, new value royalty and sliding-scale royalty.
"The managers at Royal Gold, from their offices in downtown Denver, pore over research reports on mining projects all over the world, decide which are likely to be the most productive at the most reasonable cost, and then negotiate the most favorable royalty deals.
"To the actual miners, who must invest in equipment and employees, the benefit of using royalty financing is that it avoids both equity ?nancing, which is dilutive, and debt ?nancing, which hurts the balance sheet.
"As the investor in the royalty interest, Royal Gold supplies cash in exchange for the promise of a portion of future cash ?ows, and that cash can be used immediately to explore or develop a mining property.
"What Royal Gold gets is strong cash flow and high margins, particularly when the price of gold is climbing. For the fiscal second quarter, ended December 31, the company reported free cash flow of $11.5 million, representing an amazing 79% of revenues.
"So one major attraction here is management's long-term expertise, combined with what might become a growing appetite for alternatives to debt financing. But there are two more big attractions.
"The first is the fact that in times of uncertainty-particularly in times when the economy is weak and the value of our nation's currency is in doubt-gold can increase in value, sometimes dramatically.
"The second attraction is the chart. The gold and silver mining sector is currently ranked number one of all our sectors, and RGLD is one of the few that has hit new multi-year peaks in recent months.
"We recommend taking a pilot position in RGLD now, averaging up over time if the stock rewards, and cutting losses short if the stock disappoints."
Steven Halpern's TheStockAdvisors.com offers a daily look at the latest market commentary and favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.
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