In a recent interesting article in the Fool’s network, the author refers to the main advantages of investing in streaming and royalty companies such as Silver Wheaton (NYSE: SLW), Royal Gold (NASDAQ: RGLD) and Franco-Nevada (NYSE:FNV) over gold producers such as Barrick Gold or precious metals ETFs such as SPDR Gold. Basically, streaming and royalty companies have high profit margins and less operational risk than gold and silver producers; they also offer dividend payments, while precious metals ETFs take a management fee. In this article I will examine the main differences among Silver Wheaton, Royal Gold and Franco-Nevada. Specifically, let’s examine these companies’ projected growth in 2014, financial risk, and metals mix.
Expected growth in operations
One of the main differences among these three companies is the expected growth in their operations. In 2014, Silver Wheaton expects to increase by only 0.5% its volume of silver equivalent ounces produced. Most of this growth will come from its gold operations.
This year, Franco-Nevada plans to increase its production by 5.5%, year over year. This is another factor that will push its stock higher. Moreover, the company has the means to reach even a higher growth rate with over $770 million in cash and an unused $500 million credit line;
On the other hand, Royal Gold isn’t likely to augment its production this year; this is mainly because its gold producers are expected to mine lower grades metals. Because of this development, in the last quarter of 2013, the company’s production volume declined by 31%, year over year. Nonetheless, Royal Gold expects an increase in its Peñasquito production, which could offset some of the negative impact the shift towards lower grades metals will have on total production.
Therefore, for those who seek a higher growing company will be better off choosing Franco-Nevada; Silver Wheaton and Royal Gold offer little potential growth in volume anytime soon.
The financial risk
Another issue to consider is the level of financial risk each company incorporates. As of the last quarter of 2013, Silver Wheaton’s debt-to-equity ratio was the highest of the three at 0.3. Conversely, Franco-Nevada’s ratio is the lowest at 0.03. This means, the burden of debt Franco-Nevada holds is the lowest of the three; in other words, the company holds the least financial risk from its balance sheet point of view. Another measure worth noticing in this respect is the quick ratio, which is a crude measure of a company’s ability to cover its short term liabilities in case of need. Since this measure doesn’t consider a company’s working capital , it should be taken with a grain of salt.
As you can see, Silver Wheaton’s quick ratio is the lowest at 4.7, while Royal Gold is the highest at 29. This result suggests that Silver Wheaton’s risk of reaching a liquidity problem is higher than the other two companies. Another major difference these companies have is the mixture of the commodities they sell.
Finding the right mix
All three companies heavily rely on precious metals, but Silver Wheaton’s main metal is silver (no surprise there). In 2014, the company expects its silver operations will account for 74% of its total operations. The rest is gold. Back in 2012 this ratio was 91% for silver and 9% for gold. The shift was soon after the company acquired the Sudbury and Salobo mines back in early 2013.
Royal Gold also sells gold and silver, but their main metal is gold. Back in 2013, gold accounted for roughly 80% of the total precious metals produced. The rest was silver.
For Franco-Nevada , gold accounts for accounted for 68% of its total revenue during 2013. The company also sells other metals including palladium and platinum, which accounted for roughly 13% of its total sales last year. Finally, 17% of its total revenue came from oil and gas sales. Therefore, investors, who seek to expand their portfolio with a wider array of metals, could be better off considering Franco-Nevada.
Choosing among the above-mentioned streaming and royalty companies isn’t an easy task and it mainly depends on the level of risk you are willing to take, the mix of commodities you prefer and the importance you place on growth. These companies have other difference such as the type of contracts, currency risk and more. But this analysis should provide you with some clarity regarding the main characteristics these companies have.
For further reading:
- Will Gold Recover from its Recent Fall?
- What Could Impede This Gold Company?
- Will The Gold Market Continue to Cool Down?
- Will Gold Continue to Dwindle?
Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.