Let's say you've got some traditional mutual funds full of stocks and bonds
and they're way up. You're worried by all the taper talk and the charts that
show share prices and margin debt back up to pre-crash levels, and you're wondering
whether it's time to redirect some of that capital to someplace that no one
is calling a bubble.
Meanwhile, you've noticed that precious metals mining stocks are in another
of their periodic corrections, with this one looking a lot like 2008's bloodbath
-- which was followed by an epic bull market:
But with gold and silver below the production cost of a lot of miners, there's
a ton of risk to go with the seemingly huge upside. So committing to individual
miners is terrifying. Still, that's how it always looks at the bottom.
So if you're going to buy one, which would it be?
Let's start with the premise that at a bear market bottom investors, having
been faked out so many times on the way down, don't trust the turn. So to the
extent that they buy anything, they buy the safest names. If the miners keep
to this pattern, next year will be good for the best and mediocre for the rest.
And in mining the safest bets are the royalty and streaming companies that
don't actually mine metal themselves but contract with other mines to take
part of their future output. They do this in a variety of ways ranging from
buying up existing royalty agreements that call for a given number of ounces
delivered over a specified period of time, to in effect making equity investments
in mines in return for some portion of future production. The first is passive
investing, the second more like venture capital.
The biggest companies in this space have been able to gain interests in lots
of mines on generally favorable terms. Here are the three to consider:
Not Risk-Free
A lot of these companies' investments depend on mines expanding or continuing
to produce as expected. Should the price of gold and silver fall much from
here there will be wholesale project cancellations and mine shutdowns, which
would mean less cash flow from their positions. This is a very real risk, but
even so, the impact on the royalty/streaming companies would be less than on
the typical miner because the former have spread their bets among so many different
mines.
The other issue is the availability of good investments going forward. The
royalty companies have to invest their cash at rates that exceed their cost
of capital. Such deals are scarce in this environment and will get scarcer
if metals prices don't recover. Here again, though, we're talking about diminishing
cash flow, not an existential threat.
Meanwhile, in a really bad market these companies become the king makers in
the industry, deciding which juniors live or die and using that power to cut
deals that become hugely favorable when prices revive and those new mines are
developed.
To sum up, these companies are not as safe as owning bullion intelligently
stored, but they're safer than the typical miner, with considerable upside
margin over metals prices if things turn around from here.
