It’s no secret that gold is having a bit of a moment right now.

In the past five years, gold’s price has climbed from less than $1,300/oz to more than $2,000/oz – for an annualized return just shy of 10% over that period.

Traditionally, there are two ways to get exposure to gold during a boom:

But today, Gold Royalty Corp (NYSE American: GROY) is offering investors an innovative third option – gold royalties.

What are gold royalties?

In the past, we’ve explored the idea of royalty investments – especially in relation to music.

The basic idea of a royalty is that you make a single, upfront payment in exchange for the income generated by a specific asset.

This claim is usually perpetual, meaning it lasts forever – kind of like a bond that never matures.

Gold royalties follow the same basic model. A royalty company (like Gold Royalty Corp) fronts money to a mining operator, who uses the cash to expand and develop a mine.

When that mine produces gold, a portion of the revenue generated is diverted to the royalty company as payment.

At first glance, this might just seem like a roundabout way of investing in gold mines.

But for investors, there are a number of specific advantages associated with the royalty route:

No capital calls

Mines are notoriously capital-intensive operations, frequently requiring new financing just to maintain their production levels.

But a royalty holder never needs to contribute more capital as they’re responsible for just one payment – and since they’re not part-owners of the mine, aren’t subject to dilution risk either.

Increased diversification

Investing in a single mining project introduces a lot of concentrated risk.

But diversifying a mining company is no easy task. Each additional project involves a lot more labor and resources. 

For a royalty company, though, diversification is much simpler - just purchase royalties at other mines. That’s the beauty of the single upfront payment.

Reduced exposure to cost inflation

Most importantly, royalties are based on top-line revenue figures, not bottom-line income ones.

That means royalty holders are inherently less exposed to the operating costs of running a mine – a factor of even greater importance as cost inflation has rocked the industry.

And even though royalty holders aren’t responsible for production costs, their income claim still extends to new discoveries at the specified mine – providing huge upside potential.

Gold Royalty Corp (GROY)

Gold Royalty Corp is one company leading the charge in the royalty-based model, offering gold investors a new way to access one of the oldest investments in the world. 

A Canadian company, Gold Royalty Corp launched in 2020 as a spinoff from a major mining firm, concentrating efforts on the fast-growing royalty area. 

A year later, Gold Royalty Crop went public on the NYSE American exchange.

Listing in America allowed for greater liquidity than a smaller Canadian exchange – GROY shares currently have an average trading volume of 400K+ shares daily.

Today, the firm has assembled a sizable portfolio of geographically diversified royalty claims.

Portfolio

Gold Royalty Corp’s portfolio includes over 245 royalties operated by premier partners and anchored in jurisdictions with strong resource rights.

Some cornerstone royalty assets include:

While the firm focuses on major assets in North America, Gold Royalty Corp is also geographically diversified, with assets as far afield as Colombia, Brazil, and Turkey.

All in all, this portfolio is powering strong revenue figures.

While the company is a bit too young to learn much from their historical financials, consensus analyst estimates put expected revenue growth at 66% over the next three years.

Income might take a bit longer to catch up, but that’s to be expected – Gold Royalty Corp is in growth mode, expanding their portfolio by more than 13x since their 2021 IPO.

What’s more, Gold Royalty Corp is led by a team with deep experience in all aspects of the gold mining industry.

Is now the time for gold royalties?

Gold has had a strong past few years – but there’s good reason to think the market might be set for even further growth, especially in the royalty sphere.

Royalties solve a major financing problem

Currently, gold mining companies are really struggling to raise money through traditional sources.

As we’ve seen, mining companies are capital-intensive firms, requiring a lot of money and resources to get metal out of the ground.

That means higher rates have been particularly punishing to these firms - especially as capital discipline has forced investors to become more picky about the projects they’re willing to back.

What’s more, ESG considerations are turning a lot of investors off this sector.

This challenge is even more pertinent for junior mining operations, who are facing a more significant financing pullback than established firms.  

Considering all these factors, the door is open for alternative financing solutions like royalties to become a more critical part of mine funding – allowing for an expansion in royalty company portfolios.

Gold prices have multiple tailwinds

While financing trends should create more royalty opportunities, rising gold demand should also make those royalties more valuable.

Gold prices are being buoyed by three main macro trends:

As an investment with (relatively) stable value, gold has long been thought of as an inflation hedge.

Gold’s performance as a hedge against rising prices is far from perfect, but Fed research indicates that inflation (and inflation expectations) has long been one of the most dominant factors influencing gold prices. 

While metals like lithium and cobalt usually capture investor attention as technology metals, gold plays an underappreciated role in advanced tech.

Gold is used extensively in aerospace & semiconductor manufacturing, as well as in smaller quantities in electric vehicles.

As these high-tech sectors expand in the coming years, gold demand could rise too.

Finally, gold is playing an increasingly important role in managing monetary policy.

In 2022, central bank gold purchases were the highest on record.

As central banks navigate a multipolar world where the dollar could play less of a role, expect gold’s neutrality and stability to be attractive as a foreign reserve – and further power demand for the metal. 

Team

President & CEO David Garofalo has been at the helm since 2020. Previously, David has served as President & CEO of companies like Goldcorp and Hudbay Minerals – both gold/metals production companies.

CFO Andrew Gubbels joined the team from gold mining company Aris Gold Corporation, where he was a founding executive. Previously, Andrew served as Head of Americas Metals & Mining at UBS.

Chief Development Officer John W. Griffith has nearly 30 years of financial sector experience spanning three continents, including serving as Head of Americas Metals & Mining Investment Banking at Bank of America.

Director of Technical Services Alastair Still holds a Master of Science in structural geology and has over 25 years of experience working for major gold miners. Alastair also serves as the CEO of GoldMining Inc.

Disclosures from Alts

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