Gold and Silver Royalty Companies Beat Miners As Big Deposits Grow Scarce

Photo: Gold and Silver Royalty Companies Beat Miners As Big Deposits Grow Scarce

It has been a tough decade for gold miners. Everything was looking up in 2012, only to have the next few years turn into a nightmare. Many of the major mining companies were taking on huge amounts of debt as the market for gold shattered, and this left a lot of precious metal mining companies in need of cash. Unfortunately, when an entire sector takes a turn for the worse, finding capital can be difficult.

For gold and silver royalty companies on the other hand, the last five years have been a bonanza. Many of the biggest royalty companies out there have been able to grow their revenue base, and at rock bottom prices. In addition to having a business model that strips risk out of investing in precious metals, the market appears to favor investments in royalty companies over the miners themselves.

The real loser in the last decade has been the junior miners, but this may only be the beginning of a much larger cycle. In the past, junior miners have been responsible for discovering at least half of the major gold deposits. Of course many junior miners spend all their capital on drilling out worthless land, but that is the name of the game.

The odds of success in the junior space are slim, but when they hit, a 100x return isn't uncommon. But because of some structural changes in the way investors buy into metals, the junior space never really recovered from the downturn in 2012.

A Growing Concern

One of the biggest royalty companies out there is Franco-Nevada, and in a recent interview their Chairman, Pierre Lassonde, had some strong warnings to deliver. The major problem that has emerged over the last decade has to do with investment, and especially with a lack of investment in exploration by the major mining companies. In the past the majors always could rely on the junior space, but today, that development model is broken.

The rise of ETF's has created a market dynamic that created “chosen” companies, and leaves the rest out in the cold. The means that the market that supported junior gold miners of days past has disappeared, to be replaced with an investment mentality that is highly risk adverse. There is just one small problem, and that is: finding new precious metals deposits is a very risky business.

Mr. Lassonde had this to say on the matter, “If you look at the last 15 years, we found no 50 million ounce deposit, no 30 million ounce deposit and only very few 15 million ounce deposits. So where are those great big deposits we found in the past? How are they going to be replaced? We don’t know.”

Major Moves

While major gold miner's share prices have been lagging, royalty companies like Franco-Nevada shares have been moving up this year. The gold price has been more or less stable this year, and at times has shown modest gains. Despite this the FTSE GoldMines Index has struggled to keep up with the percentage rise in gold prices. On the other hand, most royalties companies have seen gains of 25% or more in their share prices. This creates something of a conundrum for investors, and continues to put pressure on the majors who need to add reserves.

Gold mining is a hard business, and there will always be companies that are more attractive than others. If you want to gain insight into some of the mining companies that are likely to rise significantly in a gold bull market, the upcoming Silver and Gold Summit in San Francisco is a great place to be on November 20th and 21st. Investors like Doug Casey, Frank Curzio and Marin Katusa will be presenting their ideas, and there are sure to be great ideas flying!