Zeev's Turnips Patch-No Politics (ZEEV)

[basserdan]

*** Gold related post (RGLD) ***

G'morning Fred,
Here's a bit more info on RGLD:

More Concerning Royal Gold
by Rick Ackerman

I received quite a few letters yesterday concerning Royal Gold, which has been under pressure because of a sell recommendation issued earlier in the week by a popular investment advisory. Before the stock rebounded somewhat yesterday following a bout of weakness in the opening hour, some Black Box subscribers with investment positions in the stock e-mailed me to suggest that I may have added fuel to the fire by mentioning a worst-case price target for RGLD 20% below current levels. We’ll sort out the pros and cons over the next few days, I hope, but for now I am not contemplating any changes in our “official” long position. The stock was trading at a high multiple and may have gotten a bit ahead of itself, is all. But I will try to be as objective as possible in assessing the stock’s prospects. We can start with this especially insightful note, from Tom S.:

“Rick, I took a very quick look at Royal Gold's most recent earnings release (August 12, 2003 for the year ended June 30, 2003) and actually came up with a few reasons why the stock might be languishing (I know you were asking for the bullish case, but I don't know what that would be). First, fiscal 2003 net income was $6M or $0.34 per undiluted share, which is a P/E of over 60 at the current price of $21.00 per share. Although RGLD earnings have grown impressively the last two years, this is a pretty hefty multiple for a gold stock.

Royalties Fixed

“Second, RGLD collects royalties on gold mined by contract producers on property that it owns or has a stake on, but a portion of the royalty is fixed (i.e. $3/oz. no matter the price of gold). I didn't calculate what proportion is fixed and what is "sliding scale" as RGLD puts it, but obviously RGLD is not leveraged to the price of gold like a fully unhedged producer. While receiving a fixed price for each oz. of gold pulled from the ground is probably a good hedge against falling gold prices, it must be noted that RGLD does not determine the rate of production and therefore its revenues and earnings appear to be entirely dependent on the business decisions of others. I worked for a company like that once and it unsurprisingly went bankrupt. Never again.

“Third, even while the average price of gold has increased from fiscal 2002 to fiscal 2003, gold production at all RGLD properties seems to have declined. For example, 1,174,276 oz. gold was produced at the "Pipeline Mining Complex" in fiscal 2002, but this fell to 1,067,071 during fiscal 2003. Worse, RGLD's producer at this site expects to produce about 1,000,000 oz. for calendar 2003, which implies a continuing decrease in the rate of production during the second half of the year.

Acquisitions ‘Key’

“Fourth, while RGLD's obvious appeal is a business model that relies on acquisition of mining stakes to build an ever-growing royalty base, at some point competition for exploration plays or producing gold properties might make such an acquisition strategy either too expensive or impossible to carry out.

“Please understand that I only spent a few minutes reviewing RGLD's website and its earnings release and I am not a follower of the stock. However, the little that I've seen is enough for me to conclude that RGLD is possibly not the best way to play the upside in gold. As a contrast, SSRI has not entered into contracts with producers at current (or lower) silver prices and therefore has a much better exposure to rising silver prices than does RGLD to gold. Even then, I have doubts that SSRI itself can capitalize from a spike in the price of silver unless it was willing to either hedge its underground holdings or sell its properties outright before the bull market reaches its end (by the time mining production ramps up, the price of silver will invariably be on its way down). If RGLD switches from an acquisition strategy to a divestiture strategy at the right time, it too could make some serious money. But that's a tall order I'm not willing to place a bet on.”

http://www.marketwise.com/MW_WiseG/BBF_Archive/20030911.htm