Precious Metals Royalty & Streaming Companies: What are they and should you own them?
So, what exactly is a Royalty Company? To put it simply, a gold or other precious metal royalty company owns the rights to the royalties or a portion of the royalties on a collection of different mines. The royalty itself is typically a small percentage of all the gold or other metal mined from the given area where the royalty applies. This royalty gives them an ongoing percentage of production from each mine.
Under a metal streaming agreement, the streaming company provides an upfront payment to acquire the right to future deliveries of a predefined percentage of metal production of a mining operation. The streaming company also pays some ongoing payments that are usually well below the market price of the metal. Most, if not all, of the royalty companies are also streaming companies, therefore known as gold (precious metal) royalty and streaming companies.
Benefits of Owning a Gold Royalty Company
• Exposure to gold price as well as future gold prices
• Upside potential of mining companies without the additional costs
• Some of the highest market capitalization per employee in the entire stock market
• Typically less volatile than mining stocks
• Offer a Yield or Dividend unlike owning physical or paper gold directly
You can see by the chart above that royalty and streaming companies can obtain superior gains in comparison to the underlying precious metals themselves. The industry is fairly small with the five largest companies making up roughly 90-95% of the entire industry market capitalization. The weighted index listed above takes that into consideration, therefore weighting the royalty and streaming companies by their market capitalization (overall size), which achieved higher returns than an equal percentage in each company (non-weighted index).
Who Should Own Precious Metals Royalty & Streaming Companies?
While explaining what royalty and streaming companies are, as well as the benefits of owning them, are pretty straight forward, it’s a little bit more difficult to dictate exactly who should own shares of these companies. If someone is looking to buy and sell stock on a day trading basis, these companies may or may not be a great fit depending upon their strategy. If someone is looking to hedge against inflation and other economic factors, beyond owning precious metals directly, these royalty and streaming companies can certainly offer that same hedging exposure. If someone is looking to own stocks tied to the mining of precious metals in anticipation of high upswings (along with potential down swings) that person might be better off owning mining stocks directly, although royalty and streaming stocks could help lessen the volatility of their precious metals portfolio.
At the end of the day, diversification is key to limiting risk while participating in potential gains across different asset classes and sectors. Precious Metals Royalty and Streaming companies offer a unique exposure to the precious metals market with benefits outlined previously. When analyzing your asset allocation, it may be wise to consider these royalty companies as part of your precious metals holdings rather than your stock holdings due to their strong ties to the sector. If you want to learn more about investing in Gold Royalties, contact us today!