"As the name suggests, Royal Gold (NASDAQ: RGLD) is a royalty company, one of the larger and longest-established of such companies, with a focus on gold," says resource exprt Adrian Day.
In his Global Analyst advisory, he explains, "In my view, the stock offers a combination of growth, low risk, and high potential." Here's his look at this "golden opportunity."
"In the past year, the company has acquired two significant royalty packages, the first last year from Barrick and more recently from Teck Cominco. The Barrick package includes approximately 70 royalties.
"Even before these acquisitions, it had a solid long-term growth record, in royalties and in revenues. Its pipeline is solid, including a royalty on the large Pensasquito mine of Goldcorp; when that ramps up in 2012, it will add about 25% to Royal's revenues.
"The company pays a modest dividend (yielding a little less than 1%), but has plans to increase 'prudently' over time.
"The stock is down over the past few months-it was $49 at the end of March-not only because of gold's modest correction which has seen all gold stock fall back, but more importantly because of a massive offering (for new stock equating over 20% of shares outstanding) to help pay for the Teck royalty.
"At the current price, it is trading at the low end of its historical valuation range; if it were to trade just at its average multiples, it would be closer to $60 a share.
"This will add revenue quickly Because of the large equity dilution, it is important to focus on this new royalty, representing 75% of the gold by-product from Teck's Andacollo copper mine, beginning early next year.
"This is expected to be a long-life mine, and the 75% of the gold production last until 910 ounces have been sold (representing approximately 17 years of production), at which point the royalty drops to 50% of the gold produced.
"At the current price of gold, Royal Gold paid (in cash and shares) less than 8 times annual revenue. At current prices, this is an accretive transaction, and a positive one, particularly considering there is no debt attached. (The company's total long-term debt is very low, at less than 4% of equity.)
"In short, Royal Gold has a solid balance sheet, a good long-term growth record, an attractive pipeline of major projects over the next few years, and a business model we like.
"Add to that, we can now buy it at a 30% lower price than a month ago (lower than the new equity offering), and close to its lows in terms of valuation metrics."
Steven Halpern's TheStockAdvisors.com offers a free daily overview of the favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.
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