Black Box Forecasts: "Six hours ahead of its time" Rick Ackerman Full Trading Notes for Wed Mar 5, 2003
Defending Royal Gold
We've received some excellent feedback concerning yesterday's comments on Royal Gold, which came in for quite a thrashing in the current issue of Barron's. Because we remain bullish on the stock long-term, we are inclined to thank the author of the article, Rhonda Brammer, for helping to knock the price of Royal's shares back down to relative bargain levels. The stock fetched nearly $29 a share as recently as early February, but it could have been had for as little as $12.85 on Monday when fearful shareholders, evidently reacting to the Barron's article, bailed out in droves. And for what? ask two Black Box subscribers who evidently are closely in tune with gold markets. Both suggest that Royal is a poor choice for our upcoming "Dirty Dozen" list simply because it is a darned good company. I'm convinced now that they are right. Here is what Dave K. had to say:
"Not sure why you would be putting RGLD on your "dirty dozen" gold stock list. A discounted cash flow analysis for mining stocks is the most retarded metric for valuing gold stocks that I can think of. Have you done any real fundamental analysis of RGLD? Clearly the jack-ass that Rhonda Brammer quoted was a hedge fund manager taking advantage of weak technicals in mining shares, especially RGLD.
"RGLD is a somewhat unique gold company. Most of their revenues are derived from sliding-scale royalties from properties that they discovered then sold to developmental companies. As the price of gold increases, RGLD stands to reap increasingly greater royalties from each of the producing properties in which is has interests. They list their royalty agreements on their web-site, so it is very easy to derive potential valuations from existing agreements.
'Cadillac' of Miners
"In a sense, RGLD can be considered one the 'Cadillacs' among the miners. And, quite frankly, their disclosure is exemplary by any company's standards. Ms. Brammer did all of us a favor by publishing that fraudulent piece this weekend....I've been waiting for RGLD to pullback like this and will be buying with both hands."
A second letter, from Dr. B, makes some additional points:
"RGLD is 'doubly leveraged' to the price of gold. Normal (profitable, unhedged) gold miners are only leveraged to the POG at a single level - meaning that a small percentage increase of the POG leads to a disproportionately high percentage increase of their earnings. However, RLGD is a royalty company. The terms of its contracts specify that the percentage of royalty they get from the mining companies that mine RGLD's property increases as the POG increases. Therefore, in an environment of rising POG, RGLD would do much better than an average stock of an unhedged and profitable gold mining company. (Conversely, in an environment of a falling POG, it will do much worse.)
No Dirty Dozen Candidate
"Therefore, I don't think that including RGLD on your Dirty Dozen list is a good idea. That is, if I understand the idea behind that list correctly - namely, to show that even the worst gold mining stocks would outperform the SPX in an environment of rising POG. RGLD is definitely not among the 'worst gold miners' in such an environment.
"Of course, it is always possible that I have misunderstood the purpose of the Dirty Dozen list. Perhaps you want to put on it 'the most hated' gold stocks - as opposed to the worst ones? (The two sets are not necessarily identical.)
"Regarding the Barron's article - I haven't read it, but the stated P/E of 65 for RGLD simply doesn't sound right; the real P/E was more like 31. While that might still be rather high, it is nothing compared to the P/E of other gold miners (like AEM - in the triple digits) or most stocks on the NDX that have no earnings at all. But I don't care about the P/Es anyway. I'll go by the chart any time. And the chart has been saying 'stay out of RLGD' for more than two weeks already."
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