When looking for exposure to gold, investors have several choices: gold coins, gold ETFs, and gold stocks. And even among the latter, there is diversity. For example, one could choose a royalty and streaming company like Royal Gold (RGLD 0.92%) or a gold miner like Goldcorp (GG). There's no easy answer, so let's compare the two to see which offers investors the better opportunity.
Royal Gold makes its money through royalties, which give it the ability to collect a percentage of mineral production from mining operations, and through the acquisition of streams, which allows it to purchase for an upfront payment all or a portion of one or more the precious metals produced from a mine for a set term. In part because of this business model, the company characterizes itself as a "unique and lower risk investment opportunity."
Image source: Getty Images.
Goldcorp, on the other hand, generates revenue from selling the yellow stuff it produces from its four mines in Canada, two mines in Mexico, and four mines in Central and South America. Now, with a sense of how these companies operate, let's compare them on some common metrics to gain better insight.
| Company | Market Cap | Dividend Yield | FY 2016 Revenue | FY 2016 Earnings per Share | Return on Equity (3-Year Average) |
|---|---|---|---|---|---|
| Royal Gold | $5.1 billion | 1.21% | $360 million | ($1.18) | 0.50% |
| Goldcorp | $11.6 billion | 0.59% | $3.51 billion | $0.19 | (12.84%) |
Data source: Morningstar.
From this brief look, there's no clear winner. So let's grab our pickaxes and dig deeper.
The case for Royal Gold
Arguably, one of the most compelling reasons to invest in Royal Gold is that it provides investors with a less-risky approach to a gold investment. Because it collects royalties and streams, it doesn't bear the inherent risk associated with conducting mining operations. And its well-diversified portfolio -- which includes industry leaders like Barrick Gold, Newmont Mining Corp., Agnico-Eagle, and Yamana Gold -- ensures that the poor performance of one of its properties will not have too deleterious an effect on its finances. Furthermore, as of the end of fiscal 2016, the company had a portfolio of 24 projects in the development phase and 130 properties in evaluation and exploration phase, which suggests there's plenty of growth ahead.
Another benefit of Royal Gold's business model is its ability to produce high margins. According to Morningstar, Royal Gold's average gross margin over the past 10 years is 91.4%, and its average operating margin during the same period is 42.8%. Goldcorp, however, has an average gross margin of 32.9% over the past 10 years and an average operating margin of negative 3.5%.
Because Royal Gold has such limited expenses, it can use the cash it generates from its high margins to invest in new properties without having to rely too heavily on debt. Moreover, it provides Royal Gold with the opportunity to reward shareholders with a higher dividend than gold miners like Goldcorp.
Whereas gold miners usually have lower yields, royalty and streaming companies often provide higher yields since they can afford to return cash to shareholders instead of having to reinvest it in their businesses.
RGLD Dividend data by YCharts.
Even when faced with a decline in the price of gold, Royal Gold can continue to steadily return increasing amounts of cash to shareholders. Goldcorp cannot.
One can find further evidence of its ability to prosper despite the whims of the gold market by looking at the stock's past performance. Of course, this doesn't guarantee future success, but it's certainly worth noting.
Over the past 10 years, Royal Gold has crushed both the S&P 500 and Goldcorp. This doesn't guarantee the company will continue this trend for the next 10 years, nor does it suggest Goldcorp will continue to flounder. But it does illustrate how two companies exposed to gold can follow two strikingly different growth trajectories.
The case for Goldcorp
The case for choosing Royal Gold seems pretty strong. However, there's an argument that could be made for Goldcorp -- one that's based on its current valuation. According to Morningstar, Goldcorp is trading at about 0.9 times its book value, lower than its five-year average of 1.1. The stock's inexpensive price tag is also seen in terms of sales; it's currently trading about 3.4 times trailing sales compared to its five-year average of 4.6. Finally, we find that the company shines as a value stock when comparing its current price to its cash flow. The stock trades at 12 times its three-year average operating cash flow -- below its five-year average of 14.2.
Of course, a low price tag in and of itself isn't a reason to invest in a stock. One must be confident that the business behind the stock is sound, and in terms of Goldcorp, that's certainly the case. The company reported all-in sustaining costs (AISC) of $856 per gold ounce for fiscal 2016 -- a better margin than many of its leading peers. It also has a well-articulated expansion plan, which suggests that the company has plenty of growth ahead. According to management, Goldcorp will grow both its gold production and reserves 20% over its fiscal 2016 levels while reducing its AISC by 20% to $700 per gold ounce by 2021.
And the winner is...
Despite its attractive price tag and the prospect of a shimmering future, Goldcorp doesn't seem as enticing an investment as Royal Gold. The latter's commitment to its dividend and its well-diversified portfolio provide compelling reasons to choose it over Goldcorp -- not to mention the significantly lower risk it enjoys as a royalty and streaming company. Royal Gold is on the right track if it maintains its high margins, a growing portfolio, and steadfast commitment to its dividend.
