Could Royal Gold turn it around in 2013?

Shares of Royal Gold, Inc. (NASDAQ: RGLD), much like many other gold companies’ stocks, haven’t performed well during 2013 (up to date) as they tumbled down by more than 35%. Nonetheless, Royal Gold’s business model is different than other gold companies as it relies on royalty payments from precious metals miners; this type of business model lowers the company’s risk compared to the risk gold producers’ face. Will Royal Gold’s business model pull up the company’s stock in 2013?

Higher dependency on gold

One of the main factors that affect the company’s revenues growth and profits is the price of gold. Gold royalties’ revenues accounted for nearly 73% of the company’s revenues in the first quarter of 2013. In comparison, in the first quarter of 2012 gold sales accounted for only 64% out of total revenues. This means, the company’s dependency on gold has risen so that if gold price won’t increase Royal Gold’s profitability will dwindle. The higher dependency in gold is making Royal Gold a better gold investment for those who wish to increase their gold exposure.

Gold price is falling

The price of gold in the first quarter of 2013 fell by 3.5% (year-over-year). The table below summarizes the changes in precious metals prices.

gold priceThis drop in prices has already adversely affected Royal Gold’s profit margin as it fell from 61.6% in the first quarter of 2012 to 57.9% in the first quarter of 2013. Moreover, in recent months the price of gold fell and is currently at 1,365 oz. Based on current available data, in the second quarter of 2013, the price of gold is around 1,441, which is 10.6% lower than the average price in the second quarter of 2012. This means, assuming all things equal, the company’s profitability could decline by an additional 5 to 6 percent points.

Production is falling

Despite the rise in revenues in the first quarter of 2013, the company’s operators’ production in gold fell by nearly 3% (year-over-year). Moreover, the production of many other precious metals including silver fell during the first quarter. The table below summarizes these findings.

gold price Gold productionIn 2013, the company estimates its operators’ gold production will decline by roughly 12% compared to 2012. Royal Gold’s acquisition of part of Mt. Milligan copper-gold project back at the end of 2012 won’t be enough to augment Royal Gold’s revenues from gold in 2013. Thus, the expected drop in production of gold and the decline in gold price is likely to further pull back the company’s revenues growth and bring down its profit margin in the coming quarters.

Despite the expected decline in revenues and profitability, Royal Gold is still a solid investment for those who wish to expose their portfolio to gold.

Advantage over gold producers

The main advantage the company has over leading gold producers such as Goldcorp (GG) and Barrick Gold (ABX) is that its level of risk is much lower. Royal Gold’s business model is based on royalty payments so that it doesn’t have to deal with rising costs of production. Moreover, Royal Gold’s financial risk is lower than that of gold producers’: Royal Gold’s debt-to-equity ratio is only 0.12; Barrick’s debt-to-equity ratio is 0.65. The lower operational and financial risk of Royal Gold compared to gold producers puts the company as a less risky investment.

Advantage over gold ETF

Royal Gold is also a better option than holding SPDR Gold Shares (GLD) because unlike GLD, Royal Gold offers dividend payment. The current dividend comes to an annual yield of 1.5%. Further, holders of SPDR Gold Shares are required to pay an annual fee of 0.5%.

Looking forward

Royal Gold’s revenues and profit margins are likely to further decline in the coming months, which will bring down the company’s stock. The company is also expected to augment its exposure to gold; at the same time the company’s operators are projected to cut down their gold production in 2013.  Nonetheless, the company’s stock will continue to mostly depend on the direction of gold price. If gold price will further drop, the company’s stock is likely to follow.  Finally, if you wish to expose your portfolio to gold, this company might be your best bet.

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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.