Today’s buy idea is an out-of-favor value play from one of our newest contributors, Carl Delfeld.
Royal Gold (RGLD)
from The Value Bounce
A number of events have brought gold stocks, and RGLD with them, down sharply, as its share price is down 38.8% so far in 2013. Some reasons include:
• The pullback in gold prices to $1,275 per ounce,
• Credit to mining companies is drying up — few places to go for new capital,
• Investors fear new stock offerings that dilute their positions.
Why we are recommending RGLD
Royal Gold is not a mining company but rather a royalty company. Royalty companies offer capital to mining companies for a share of production. While gold markets are under pressure, these conditions work to the advantage of royalty companies. In short, by investing in royalty companies like RGLD, you own a share of a future income stream without the attendant costs of producing that income. Here are some further reasons to consider Royal Gold at this time:
• RGLD’s deal with Thompson Creek over its Mt. Gilligan mine is both sizable and potentially lucrative, expected to generate more than $100 million of new cash flow a year.
• RGLD will get 52.25% of gold production for a price of only $435 per ounce.
• Mt. Gilligan is set to begin production in December 2013 –expected annual production is 650,000 ounces for six years.
• RGLD has cash of $675 million versus debt of $300 million.
• Current market conditions are ideal for RGLD to negotiate further royalty agreements.
• Higher gold prices would of course boost profitability.
• Stock has begun upward trend.
Finally, RGLD has been awfully kind to investors during the last ten years. Shares have gone up more than 2,300%, several times more than many of the world’s top gold miners – and more than 11 times the stock market’s return over the same period.
Action: Buy RGLD up to $54 with 15% trailing stop loss.
Carl Delfeld, The Value Bounce, www.thevaluebounce.com, 800-250-9657, October 26, 2013