A “Royal” Opportunity in Gold

We like streamers and royalty companies due to the prospects they offer to capture value in the precious metals sector without incurring many of the costs and risks associated with mining operations.

Royal (RGLD) is one of a handful of gold royalty companies and streamers that have historically delivered results that meet our desired targets for strength and consistency over time.

As of year-end 2023, the firm’s portfolio had grown to include 178 geographically and operationally diverse properties, including 37 producing mines, 22 development properties, 52 evaluation properties, and 67 exploration sites.

Geographically, the company’s six principal properties are located all around the globe, in the U.S., Canada, Chile, Botswana, Dominican Republic, and Mexico.

Since 2014, Royal Gold (NASDAQ:) has grown revenues at an annual pace of 11.2% a year (with 2016 and 2017 removed as outliers). Growth has been consistent in the decade, pushing total revenues to $605.7 million in 2023. In the same period, the company has grown EPS at an annual 20.8%.

Looking ahead, organic growth should continue to be driven by Royal Gold’s current portfolio pipeline and properties. Four properties in Royal Gold’s portfolio have already begun or are scheduled to begin gold production in 2024.

Analysts are looking for revenues growth of 36.4% a year over the next two years, and total EPS growth of 35.5% from 2023-2025. We see the company supporting 11% annualized growth of revenues and earnings per share over the next half decade.

Pre-tax profit margins have been strong and generally trending upwards, reaching 46.4% in fiscal 2023. Quarterly margins have been stable since mid-2021. The average for the whole industry group is 22.4%, less than half of Royal Gold’s average.

The company has grown its dividends at a 16% compounded annual growth rate since 2000. Royal Gold is the only precious metal company in the S&P High Yield Dividend Aristocrats Index.

Based on its share price valuations in the last three years, we see the stock as able to support a high P/E ratio of 37.8. The P/E has been as high as 40.6 in the last 52 weeks.

At our expected growth rate, a future high price of $231 is indicated. On the downside, if the P/E were to slide to 23.2, a low price of $85 would result. From current prices, the upside/downside ratio is 4.7-to-1.

Various metrics — such as Price/Net Asset Value and Price/Cash Flow — suggest that Royal Gold is near or below a reasonable valuation, offering a respectable upside from the current price. With the addition of a modest but growing dividend, our target total return is 16.9% a year through 2028.

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