Also, for many producing companies (in fact, most producing companies in my opinion) that are trading at low multiples and whose valuations do not yet reflect the true price of gold, multiples and valuations will improve as market participants strive to catch up with the price of gold.
There is another factor that works against royalty and stream companies in a high gold price environment that also needs to be considered. It must be assumed that the high multiples at which these securities are traded also reflect the growth prospects of the investment opportunities.
Will there be as many opportunities in a high and rising gold price environment, or will royalty and stream companies face a relative dearth of investment opportunities, which will imply that premium valuations should no longer apply? It must be assumed that at least part of the bonus was based on growth prospects, on the universe of available candidates needing to strike deals with royalty and stream companies in what was a low gold price environment.
We should expect that gold miners, or indeed any gold-producing mining company, in need of financing will have more options available to them in a higher gold price environment. They could, for example, issue equity and trust that there will be demand for their shares. They could also issue debt securities with an equally high degree of confidence that they will generate enough cash to repay the loan without compromising their credit rating. Or they could rely on increased cash flow to finance their projects internally, taking advantage of better profit margins.
On the other hand, in a context where the price of gold is low, it is more difficult to have access to financing. Investors are avoiding equity financing and companies are not interested in issuing debt and risking over-indebtedness. In such circumstances, royalty and stream companies are often a good option and perhaps the only viable option, allowing them to pick the best investment opportunities and negotiate deals on more favorable terms.
Will the same high multiples given to royalty and stream companies remain when these companies no longer have the opportunity to make the best choices, when they have to take more risks and when they are forced to diversify beyond royalties? and gold flows? This is an untested hypothesis, although I suspect it has some validity.
That doesn’t mean you shouldn’t consider an investment in royalty and stream companies in the current gold price environment. We should. Yamana did just that when we recently sold our royalty portfolio in a transaction that sponsored the creation of a new royalty and stream company, in which we took a 13% stake. As such, we certainly support the model.
Royalty companies offer a diversity of mining assets and consistent returns regardless of the gold price environment. However, when it comes to percentage weightings in one’s portfolio, one needs to recalibrate in an environment where the price of gold is rising, to maximize the impact of the explosive growth in gold mining margins and cash flow. We have already started to see this effect in our share price performance and I believe we will continue to see it for a long time to come.