Longtime readers know we love contrarian investment ideas...
And after a seven-year bear market, you won't find a more contrarian idea today than gold.
Based on the Commitment of Traders – a weekly report that tells us exactly what futures traders are doing with their money – we haven't seen gold this hated since 2001... right before the precious metal began a decade-long, 500%-plus run higher – from less than $300 an ounce to more than $1,900.
Obviously, we can't know if we will see similar gains from here. And gold prices could fall again before the uptrend continues. (As our friend and investing guru Jim Rogers likes to say, prices can soar higher than you expect... and fall further than you can imagine.)
We know volatility is tough on most investors right now. But you must learn to embrace it, not run from it. That conviction will allow you to buy low and sell high. And with gold this hated and quietly starting an uptrend, we like our chances today. You should, too...
But of course, it's no secret that digging holes in the ground to find gold takes a lot of money. Plus, it's risky. The good news is, we have a "capital efficient" way to invest in gold...
To fund the hefty capital costs, a lot of mining companies turn to "royalty and streaming" companies. If you've been with us for long, you know we're big fans of this business model.
These companies provide upfront capital to mine operators. In return, they receive a percentage of sales (the royalty) or the right to purchase metals at a predetermined cost (the stream). They collect revenue based on a mine's production – not its profitability.
As part of their agreements, they receive a fixed percentage of revenue (or a fixed metal price), regardless of the price of precious metals. Plus, they aren't exposed to risky capital expenditures ("capex") such as ongoing exploration and production costs. Yet, they still get a cut of any new discoveries the miner makes on the property in which they hold a royalty.
Over the long term, the advantages of royalty and streaming companies become clear...
You can see this dynamic at work in the chart below. It tracks the five-year performance of the price of gold versus the VanEck Vectors Gold Miners Fund (GDX) – which holds a basket of gold-mining stocks – and Franco-Nevada (NYSE: FNV) – the largest publicly traded gold-royalty company. Take a look...
As you can see, while gold prices are essentially flat in this five-year span, GDX shares have fallen around 5%. But due to its superior business model, Franco-Nevada is up almost 90%.
Franco-Nevada pioneered the royalty model in precious metals. Few people know more about making money in gold than its chairman, Pierre Lassonde. His career is legendary...
Lassonde co-founded Franco-Nevada in 1982 with Seymour Schulich. It was the first publicly traded gold-royalty company. Mining giant Newmont Mining (NEM) bought the company in 2002 for $3.2 billion. Shareholders who got in at the beginning made around 36% annually from their investment.
Between 2002 and 2007, Lassonde served as president at Newmont. And he was the company's vice chairman in 2007. Then, Newmont spun off Franco-Nevada as a separate company in December 2007... Lassonde remained with Franco-Nevada. He's still the chairman of the board. According to Bloomberg, Lassonde personally owns almost 1% of the company. Investors who got in at the initial public offering ("IPO") and reinvested their dividends have made around 17% per year so far.
No one is better positioned than Lassonde and his company to profit from a huge spike in the price of gold. Luckily, you can join him for the ride...
Remember, as a royalty firm, Franco-Nevada's revenue depends on production, not the mines' profitability. Unless a mine on which it has a royalty shuts down, the company gets paid... regardless of the price of gold.
Franco-Nevada has a portfolio of nearly 400 assets all around the world – including precious metals and oil and gas properties. Precious metals make up around 80% of the company's total revenue. Its precious metals portfolio includes royalties on some of the most famous mines on Earth – including Goldstrike, Detour Lake, Kirkland Lake, Stillwater, and Candelaria.
Franco-Nevada also rewards its shareholders, increasing the total dividends paid out each year since going public in 2007. The company paid out $168 million in dividends in 2017 – a new record. The dividend yield is 1.3% at the current share price.
Best of all, Franco-Nevada doesn't need higher gold prices to thrive...
After gold hit its high in 2011, the metal declined more than 40% over the next four years. In contrast, Franco-Nevada shares rose up 15% over the same period. The stock has trended upward ever since... Gold prices are still down by one-third from that 2011 peak, but Franco-Nevada is up more than 60%. Given that we believe we're already in the next leg of this bull market, Franco-Nevada offers investors huge potential gains ahead.
Royalty companies enjoy all the upside of a bull market in gold without the usual costs associated with exploring for gold or building and operating an actual mine. It's a far superior business model to exploration and production... And Franco-Nevada is one of the best.
Sometimes investing is simple.