Here are three royalty and streaming stocks. They enjoy lower expenses and less risk than their operating peers, while enjoying the upside of any successes.
Government responses to COVID-19 are paving the way to a long-term credit crisis, excellent news for precious metals investors, as long as they can stomach a very bumpy ride to profits, says Sprott US Holdings president and CEO Rick Rule.
“Under normal circumstances, I would suggest (gold) needs a rest” following a very strong performance since last summer, Mr. Rule elaborates, but looking at the risks to the economy ahead, “I think it’s more dangerous not owning it than it is owning it.”
Mr. Rule has enjoyed a long, storied career in commodity investing (including mining, energy, water utilities, forest products and agriculture). A US native currently living in Carlsbad, Calif., he has also maintained a home and office in Vancouver for the last 20 years. In addition to his titles at Sprott US Holdings, he is also a senior managing director at Sprott Inc.
Asked where he believes the economy is headed in the next one or two quarters, Mr. Rule prefaces his response by saying he tends to think in longer terms and adds, “I’m not an economist, I’m a credit analyst.”
Credit crisis will bode well for gold investors
In that vein, Mr. Rule outlines his belief that the previous decade of economic recovery, which he attributes more to government stimulus spending, quantitative easing, and suppressed interest rates than real-world economic growth, is in the process of unwinding. He says he had previously expected this to play out as a long, dragging recession of several years, but the massive spending in response to COVID-19 and its economic fallout could hasten the process. Mr. Rule expresses skepticism that governments and central banks can resolve the latest financial crisis.
“Quantitative easing, were it done by you and I, would be called counterfeiting,” says Mr. Rule, and is debasing Canadian and US governments’ balance sheets (as well as those farther afield). “It must necessarily reduce faith in government bonds.”
Meanwhile, artificially low interest rates reduce the cost of debt, making borrowers less responsible (Mr. Rule quips that sovereign debt in particular equates to “return-free risk”) and reduce lenders’ incentive to give out loans.
Thus, he suggests that access to capital, whether through a bond offering or a stock issue, will dry up over time. That emerging credit crisis bodes poorly for most commodities, such as copper and oil, because they are economically sensitive and capital-intensive, but it is “tailor-made” for gold investors.
3 royalty and streaming stocks to buy
The market share represented by precious metals and assets in the United States stands at “historic lows”; only about 0.33 per cent to 0.5 per cent of new investment was in mining, compared to a high of seven per cent to eight per cent in 1981. Mr. Rule suggests a reversion to the 30-year mean of about 1.5 per cent to two per cent will play out. A major pull factor in uncertain times is the nature of gold. Mr. Rule says: “It’s an asset that isn’t automatically somebody else’s liability.” He observes that we appear to be in a precious metals bull market since they are traditionally led by the metals themselves. Once higher prices make their presence known on corporate balance sheets, equities climb as well, which has already proven the case among major miners. The next stage of the market will be a movement from the largest, most-traded names to lower echelons of precious metals companies, he predicts.
Mr. Rule names three stocks in his own portfolio that he argues reflect this trend as “best buy” selections investors can consider if they agree with his assessment: Sandstorm Gold Ltd. (TSX—SSL; NYSE—SAND), Altius Minerals Corp. (TSX—ALS), and EMX Royalty Corp. (TSXV—EMX).
All three are royalty and streaming companies, meaning they enjoy lower expenses and less risk than their operating peers on the ground, while enjoying the upside of any successes there.
Mr. Rule says he has been a longtime owner of Sandstorm, but has recently increased his position. He praises the company’s management and notes that its interest in the developing Hod Maden project in Turkey offers growth potential.
EMX Royalty, which has a market capitalization of about US$100 million, has taken advantage of its intellectual assets as a “prospect generator” that finds sites worth exploring, then farms out the actual work to other mining firms. Mr. Rule estimates that since its royalty portfolio could be liquidated (with ease) for US$60 million and it holds US$60 million in cash, “You have the basic business left over for free!” He also praises its growth prospects.
Altius Minerals comes at a “shockingly cheap” price, says Mr. Rule. Originally a “prospect generator” as well, it has made a name for itself through a series of successful “merchant banking” transactions, buying and then selling royalty and streaming assets (such as a uranium bull market play in the past) at a premium.
This is an edited version of an article that was originally published for subscribers in the June 5, 2020, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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