Royalty Streamers: The Best Buys in Gold

11/27/2017 5:00 am EST

Focus: COMMODITIES

Adrian Day

Chairman and CEO, Adrian Day Asset Management

Among gold investments, resources expert Adrian Day is particularly fond of royalty streamers—companies that invest in the gold sector but whose structure allows them to avoid the inherent risks of individual mining operations. Here's the latest from the editor of Global Analyst.

Franco-Nevada (FNV) had another outstanding quarter, and has outperformed its peers handily this year. Significant development: it has invested for an additional 10% interest in Cobre Panama, the large copper deposit under construction by First Quantum, with commissioning scheduled for the second half of next year.

The financing was in syndication with a unit of CK Hutchison of Hong Kong. Although the syndication was small, Franco used the deal to work through the details of such financing so it is prepared for a larger deal.

Cobre now represents nearly 15% of Franco’s NAV, its largest single assets.

The next two represent around 10% each; oil &gas in total is nearly 17% after the addition of two more relatively small assets. It has a total of 47 producing royalties and streams.

Franco also said it was confident in the structure it uses for offshore transactions, commenting (without names) on the dispute Wheaton has with the Canadian tax authorities.

Assuming the same fact pattern, it would owe $10 million to $15 million for existing deals, an insignificant amount for Franco, though any negative ruling going forward would hit future revenues meaningfully. The company has $630 million in working capital, with available capital of $1.6 billion and no debt.

This is the one to own  We repeat what we have said many times: if you are to own only one gold company and hold it for a while, Franco is that company without question. While clearly demonstrating growth potential, it also has one of the lowest risk profiles of any gold stock.


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One analyst headed its recent report on the company, “Commanding the safe-haven bid”. While we would not see today’s price—up from under $70 in early July—as a particularly bargain price to add to positions, nor for a trade, if you do not own, it’s as good as any.

Osisko Gold Royalties (OR) is the smallest of the “big four” royalty and streaming companies. It had mixed results in its latest quarter. Malartic (its largest royalty) was up, and will increase in the medium term following a successful expansion.

Eleonore, however, will decline longer term on a reduction in its reserve estimate, though there will be a major increase in 3Q18 as the ramp-up continues. The newly acquired Renard Diamond mine had a rough first quarter for Osisko, on lower production.

The company is achieving exploration success at several of the companies in its “accelerator program”, including Osisko Mining (in which it acquired an additional royalty). Under the program, Osisko funds exploration companies in return for shares and a royalty; the current investment portfolio is worth around $420 million.

Following a $300 million convertible debenture financing, Osisko will end the year with around $405 million in cash, plus access to credit, so has a solid balance sheet even after the large Orion acquisition.

Osisko also announced that its dividend reinvestment plan is now available to U.S. resident. Shares are either bought in the market, or—as this month—issued from treasury at a discount and without any commission.

Osisko remains the most “speculative” of the big four, but that is very much a relative assessment.

A solid balance sheet, entrepreneurial management, aggressive exploration, and two large, long-life gold royalties as the foundation of the company, it’s a relatively low-risk gold stock with plenty of upside. If you do not own, buy now.

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