Mining Companies or Royalty Companies: Which has been a Better Precious Metals Investment?
When the average investor thinks about precious metals, they likely envision gold and silver bars locked away in a vault somewhere. While the precious metals themselves can be a good store of value over the long term, investing in precious metals mining companies and royalty companies can typically give you gold and silver exposure with more leverage.
Mining Companies vs. Royalty Companies
It’s important to first understand what these companies are and what they do exactly, before we compare them from an investment perspective. Mining companies simply mine the precious metals from the ground, absorbing the costs of mining but also taking all or nearly all of the precious metals to market to sell. Royalty companies on the other hand do none of the mining work, but rather help mining companies with financing in order to receive a small percentage of the miner’s output from a particular project/mine for the life of the project. The royalty companies don’t have the costs of pulling the metal from the ground which keeps their expenses low. Both companies are correlated to the underlying precious metals markets, namely gold and silver. The big question is, which companies will give you the precious metals upside with the least amount of downside.
Miners vs. Royalties Performance
As you can see below, precious metals miners and junior miners (represented here with the GDX and GDXJ funds) have hit a rough patch this past decade. On the flip side, the publicly traded royalty companies have actually performed fairly well even with a booming economy and lack of mass public interest in gold or silver, only trailing the S&P500 by around 3%. It’s important to note that stand alone royalty companies are a fairly new asset class, Franco Nevada (FNV) being one of the earliest with it’s first IPO in 1983 on the Toronto Stock Exchange.
When you compare market correlation below (how closely the investments move with the stock market), the junior miners and royalty companies sit around 0.27 while the miners are around 0.18 which is what we would expect. When the stock market is down, traditionally the gold market is up, which makes both mining companies and royalty companies more profitable. Also important to note is the max drawdown. Royalty companies fell as much as 67% while miners were down 77% at one point, and junior miners were down 87%. Comparatively, the stock market was only down 19% in a given day, however this time period does not factor in the market crash in 2008 when the S&P500 had a drawdown around 50%.
Are Gold Miners or Gold Royalties a Better Investment?
The answer, of course, is that it depends on a number of different factors. When we look at performance over the past decade, the precious metals royalty companies have outperformed gold miners and junior gold miners in nearly every way. If you look at individual mining stocks or dedicated gold mining or junior gold mining funds that actively manage their portfolio, some have greatly outperformed the mining market in general. When you look at these sectors on a broad basis however, the royalty industry appears to have less downside with more sustained upside.
If an investor is looking for leveraged exposure to gold and precious metals, mining stocks can certainly help them achieve that to hedge their overall portfolio. If an investor would like to gain exposure to precious metals companies that are less volatile (in general) but still provide upside potential, royalty companies can be a great fit. It’s no secret that the royalty business model bolsters low costs and high market cap per employee, in general, which makes the industry very attractive. The caveat is that there are no dedicated sector funds that focus on precious metals royalty companies, due to the relatively small size of the industry.
For any investor looking to gain exposure to the precious metals market, it’s best to work with an advisor that has experience and specialization in the space due to the potential volatility and niche aspects of this sector.