Transcription
I love the royalty business. I love the fact that your gross is your net. I like getting checks rather than writing checks.
Royalty companies are one of Rick Rule's absolute favorite ways to profit from the gold bull market in the commodity super cycle. But, what are royalty companies? A lot of investors don't know about this group in the mining sector that is a profit printing machine long-term for patient investors. In today's video, I going to explain what makes royalty companies so unique, why they have an incredible risk reward, and which group within the royalty sector offers the best investment opportunities. If you're a private investor that's new to mining and your head is spinning with all the exploration companies, or if you, like me, don't have five PhDs in geology, this video is for you.
Welcome to Hot Trades of the Day, your show for swing trading ideas for the coming days, weeks, and month.
So, let's talk about the royalty companies. In your experience, do the royalty companies, are they an option, especially in the gold silver sector, to protect themselves better against the crash?
Yeah, absolutely.
So, what do we see right here? Well, the the golden chart, that's Wheaton Precious Metals. That is the most, probably most famous, definitely best well-known royalty company in the world. And down there at the bottom, I see you in the candlestick charts. Oh, yeah, that is the ETF GDX for the senior gold producers over the past 20 years. As you can see, Wheaton Precious Metals has outperformed the GDX by 14x. Now, you might say, "Well, well, help me there. You just picked out the one great stock and that's it." Fair enough. Fair enough. I give you number two, or some people say number one, doesn't really matter. So, the second big name in the royalty sector, and that's Franco-Nevada. And what do we see? Whoop. It's done even better. 19x outperformance to the GDX. Mhm. Thank you. Yes, please. I would like to have those gains in my portfolio. That would be nice. Look, I'm not going to waste our time here by adding more and more royalty companies. You clearly see the picture. We're going to talk about why they're outperforming in a second. Let's talk about what are royalty companies? Because they're really flying under the radar with the majority of the investors. Royalty companies are not mining companies. They are basically venture capital companies for the mining sector. So, royalty companies, or the more modern streamer companies, or streaming companies, which is almost the same thing. You'll understand in a second. They give money to mining companies to explore and develop, or expand certain projects for different metals. May be precious metals, may be critical metals, or even projects from the energy sector. In return, the royalty companies receive a percentage of the production after it starts mining for a certain number of years. And usually that duration is quite long. The streamer, and that's the difference, receives the right to buy a certain amount of ounces of gold, silver, copper at a fixed price, no matter how high the price of that metal is in the markets in the future. Now, obviously, you already figured it out. Come on, you're much smarter than me. Huge upside for the royalty companies. Especially if you are bullish for the gold price. And that leads us to the advantages and the the incredible rewards that the royalty companies offer. You have full exposure to the metal prices, for example, gold and metal gold and silver because most of the royalty companies come from the gold and silver sector. You have some that do critical metals, you have some for uranium, for example, but the majority will be precious metals. Because the royalty companies are invested in a large number of gold and silver projects. So, they profit directly from the commodity prices going up. However, and that's the beautiful part, because they invest in a large number of these projects, their risk is much, much lower than it is for the mining companies. Usually, royalty companies invest amounts into projects that end up with them owning one, sometimes up to five, but really usually it's 1 to 3%. of a project. So, that means the risk side is much, much lower than it is with the mining companies.
[clears throat]
If a project fails for whatever reason, it will only affect the portfolio of the royalty company 1, 2, or 3%. While the mining company, well, it's effed. Let's talk about Let's give you the example of Vizsla Silver for real quick. Let me Let me bring up the chart here. What you see here is Vizsla Silver. It's a silver exploration company. It was one of the top silver explorers in the world up until the basically up until January 2026. It has one of the top three silver projects undeveloped in the world that it was developing very, very successfully. And then, the share price collapsed around 58% in 6 weeks. And it as you can see, it has never really recovered. By the way, shameless plug, tomorrow we're going to talk about silver and I'm going to talk specifically about Vizsla Silver. I talked to a number of CEOs and managements in the silver sector and the precious metal sector and it confirmed what I was already thinking and I'm going to give you my special German sauerkraut theory what's going on with Visla Silver and what's happening there. So, if you are interested in Visla Silver, tomorrow's video will be for you. Now, back to the royalty companies. 58% collapse, I mean, you've got to call it what it is, crash. That doesn't happen to the royalty companies. Why? Well, they're only affected 1% 2% 3% of the whole portfolio. So, that is an immense risk reduction. On the other hand, you still have the full upside because they invested Yeah, they only invested 1 to 3% in one project, but again, they have dozens. The the big royalty companies literally have like up to 200 projects in their portfolio. And and this is something that nobody really talks about when it comes to royalty companies that is fascinating. If you have looked into mining stocks and you have or you are in have been investing in mining stocks, then you know that obviously the most spectacular gains are coming in the junior explorer and explorer level of the companies. Meaning projects that are brand new in development and then these companies really hit on the commodity that's supposed to be there and develop it and these stocks turn into multi 10 baggers. The problem is doesn't happen so So, if they have only one project and that project misses, the stock is dead. Well, with the royalty companies, that doesn't really happen. But that makes investing in royalty stocks Hang on. I going to get back to that Franco-Nevada Wheaton Precious Metals chart after this depressing Visual Silver chart. I going to need therapy if I keep this chart on. Hold on for a second. Here we go. GDX. And you know what? I got to put up the GDXJ for you. Cuz we're talking about the And now, let's get to the monthly and zoom back out. The GDXJ it's not really a 20-year chart because the GDXJ came out a little later than the GDX. That's why also the performances that you see, the comparable performances, in the time since the GDXJ got launched, uh is a little different for Wheaton Precious Metals and Franco-Nevada. But as you can see, well, hm Okay, the GDXJ, since it's launch, actually lost 6%. Wheaton Precious Metals is up 827% and Franco-Nevada is up 967%. Yeah, I would call that an outperformance. I'm pretty sure that's what its perfect definition is for. So, we have the reduced mining risk by having the full upside for gold and silver. Now, there's another huge advantage of the royalty companies and that's the costs. Two level of costs. The first one corporate costs for the royalty companies. Since they are not mining companies, and that they are basically venture capital or financing companies, they cost for the day-to-day operation is minimal. We're talking CEOs of internet companies are crying in the fetal position in the offices when they see the cost structures of the royalty companies. It's that low. Because they don't need the workforce or the equipment that the mining companies need to develop one project or two projects or three projects at the same time. Also, since they get a percentage of the production of the mine or a fixed number of ounces of the produced amount of ounces of the metal, they don't have the problems on the cost sides that the mining companies have. What happens if oil goes to 200 and stays at 200? A lot of mining companies will run into cost problems. That'll affect their margins. What happens if labor cost goes up? That's not great for the mining companies. Well, guess what? The royalty companies have none of these problems because they get their fixed ounces, right? The streamers have the right to buy a fixed number of ounces at a fixed price. That's what they get. If the costs have doubled in the past year, tripled in the past 2 years, well, that's the problem of the mining company. That's not the problem of the royalty company. So, they have none of the cost rates that the mining companies have. This is also we got to talk about one more thing that the mining sector doesn't like to talk about, which is the longer you get into the mine life of a producing mine, usually the costs go up. Why? Well, when you go into production after developing a project for a long, long time, you usually going to mine a lot of the higher graded areas first to return capital to shareholders as fast as possible. So, later in the mine, especially if you're not able to expand it by finding new lucrative high-grade areas, usually the ore goes down. Think about it if you have an underground mine. If you mine an underground mine the first 100 m or so, it's not so expensive. But then if you have to go deeper and deeper and deeper, costs keep rising. The royalty companies, they don't care. They're going to get the number of ounces or the percentage of production, no matter the cost. So, what are the risks? This is an incredible business model. Well, the risks are really only two factors, and they're not even major risks. Obviously, if the commodity supercycle doesn't happen, well, then the royalty companies still do better than the majority of the mining companies because they have uh they have percentages in producing mines. Right? Different than exploration companies who have nothing to explore in a project. But obviously, if the sentiment is bad and if nobody's buying commodities stocks and mining companies then the royalty companies will suffer as well. The royalty companies, because of this unique structure, are usually valued very very richly compared to other mining stocks. Other mining stocks especially junior producers and lower have much more attractive valuations because of the risk involved. So if we look here at Franco-Nevada and at Wheaton Precious Metals you see that the the turbo move in the share prices they really had two major moves. Right here 2019-2020 when we saw a big spike in the oil price and gold price, sorry. And then obviously here when gold broke out above 2,000. And the reason is well with the massive increase in gold prices, their profits just
[snorts]
I mean I'm I would expect that the banks called up the management of Wheaton Precious Metals and said, "I'm sorry, we cannot accept any more money for you. Your bank account is full." It It was that type of a thing that can happen to these royalty companies. And therefore then the valuations went down. And then you see what happens with the stocks. So it's okay that they're higher valuations are higher if you believe that the gold price is going to go up and that the silver price is going to go up and that the copper price is going to go up significantly in the future, there's still a lot of money to be made. But it has to be said, traditionally royalty companies have higher valuations than the mining companies because the risk is lower. The second thing is, and this is the big um reason why a lot of the private investors don't pay much attention to the royalty companies is it's not sexy. They don't have the sexy news flow. They don't have the incredible press releases that say, "Hey, we're doing our exploration. We hit on these holes and we found incredible grades, new gold deposit, expanding all silver deposit." And then the stock goes up of that mining company goes up 3x in a short amount of time. Obviously, that doesn't happen with the royalty companies. Yeah, they profit from these discoveries if they have a percentage of the project, but it's only one to or three percentage and it's one project among many. So, you don't get the short-term hype. Right? But one of the best quotes that I ever learned in the markets was a German CEO gave an interview, old economy. This is like 2000. And so the internet boom, new economy boom is in full effect. And he was asked, "Well, your stock is not moving and all these new economy companies that are trying to revolutionize your sector are going through the roof. What's up?" And he said, "Well, short-term hype can beat quality, but long-term quality always wins. The royalty companies are the perfect example in the mining sector for this quote. Short-term, especially at the end of a rally, at the at the like we saw December 25, January 26, the royalty companies will not have the spectacular gains that the mining companies have. Because these mining companies will then be completely hyped up and emotional investors going to jump on board and push the share price up. But, the royalty companies have the quality. And over time, as you can see here, there numerous phases where the companies have corrected sharply or have gone sideways, but in the end, they give out massive returns because they have the quality. Okay, so this is two down points. What else? All right, let me uh look for more negative things about the royalty companies. Yeah, I think we're done here. That's about it. So, what group of the royalty companies is most interesting? Well, Rick gave the answer in the interview.
And and understand, if you're willing to do the work, there are better values in the smaller royalty companies. The bigger royalty companies, royalty and streaming companies, trade at multiples, premiums to their net asset value.
[clears throat]
The second tier royalty companies and the third tier royalty companies trade at discounts, increasingly larger discounts, uh relative to market cap. Uh so, people who are able and willing to do the work can arbitrage valuation discrepancies between royalty companies. The Triple Flags of the world, uh the OR royalties of the world, the elementals, those companies sell at a substantial discount to the multiples that are awarded Franco and Wheaton. If you are willing to do the work, I suspect that either the arbitrage, which is to say the valuation discrepancy, ceases to exist in the market, or else the big companies will take over the small companies. A good outcome for you in either in either circumstance.
So, there you have it. The second reason why Wheaton Precious Metals, so Franco-Nevada, as you can see in the chart, had this wild run-up in the past about 2 years has been a rising precious metal prices, but also these stocks are highly weighted in the ETFs. So, that pushed up the share prices, but therefore also the valuations. The mid-tier companies did not get this ETF bump, so therefore you can get them at much more attractive prices. The institutions love the royalty company model because they look at risk first. And the risk, as you know now, is really low for the royalty companies compared to the mining companies. They don't mind giving up some upside if the risk is lower. However, a lot of the mid-tier royalty companies are too small for institutions to invest in. So, they're just waiting for these royalty companies to get big enough so they can throw their money at them. And that's the reason why the mid-tier companies in the royalty business are cheaper compared to the large royalty companies and also a lot of times compared to the value of their portfolio. That offers us incredible opportunities and we get a bonus on top, a bonus that the large royalty companies don't have. And that is M&A activity. A lot of people, if you're active in the mining sector, are talking about M&A activity. Well, it's happening a little bit. That's true in the mining sector, but it hasn't really gone crazy yet. However, in the royalty sector, M&A has been very active. Mid-tier, larger mid-tier royalty companies buying smaller mid-tier royalty companies, mergers, because everybody wants to get to the size when you're going to attract this institutional capital to get that valuation bump. So, that is the additional chance with the mid-tier royalty companies. Wow, that was a long video, but I hope it gave you a lot of knowledge. If you like what you heard, hit the subscribe button so you don't miss content like this. If you have not seen Mine of You with Rick Rule, I highly recommend you go and see it. The link is in the comments. Also, this Saturday I'll do a special video for the VIP newsletter, our free newsletter. You can sign up, you're not going to get spammed, you're just going to get quality content. We're going to go into this crash scenario that Rick and I talked about in the interview. What does that exactly mean? What should we do in the markets, within our financial structures, personal financial structures, to be prepared for a crash. So, that'll be coming up this Saturday for the VIP newsletter and will be sent out to all the people that have signed up for the VIP newsletter. Again, it's free. I'll see you tomorrow. Bye-bye.