Markets

Why Royal Gold, Inc. Shares Fell 18% in January

What: Royal Gold stock sank a hefty 18% last month, recovering some lost ground earlier in January, as gold prices started to tick higher. But the full-month drop starts 2016 on nearly as bad a note as 2015 ended, because the precious metals company's shares fell roughly 40% last year. But there's more going on here than meets the eye.

So What: In early January, Royal Gold announced its production and sales data for the fourth quarter of 2015. Although it sold materially more gold, it earned less per ounce sequentially compared to the third quarter, and much less than it did in the same period a year ago. So it's not surprising that investors were negative on the shares, because the price of what the company sells has been languishing.

The thing is, Royal Gold isn't a precious metals miner -- it's a streaming company. This means that it provides upfront cash payments to miners in exchange for the right to buy precious metals in the future at reduced prices. In the fourth quarter of 2015, Royal Gold paid just $370 per ounce for the gold it sold. That's well below the current price of gold . So it's earning less per ounce than it once did, but it's still got a lot of leeway between what it pays for gold and the current market price.

In fact, despite the weak precious metals market, Royal Gold looks to be in fine shape. On the company's investor relations page, CEO Tony Jensen is quoted saying, "While many companies in the gold sector have been busy implementing survival strategies, we have been building our business." What's that mean? In 2015, the company inked a $610 million streaming deal with Barrick Gold , a $175 million deal with New Gold , a $525 million deal with Teck Resources , and a $130 million deal with Golden Star Resources.

Essentially, miners like Teck and Barrick are facing big headwinds from falling commodity prices. They need cash to either continue their expansion efforts, or to shore up their balance sheets. Royal Gold has been able to take advantage of that situation by providing the cash, and growing its future "stream" of precious metals. In fact, Royal Gold upped its dividend 5% in November. That's the exact opposite of what Teck and Barrick have been doing with their dividends, and shows the strength of Royal Gold's underlying business model.

Now What: If you're looking at the gold space for an investment, consider a company like Royal Gold. It avoids the costs and risks associated with running mines, and thus has very low operating costs. Falling gold prices hurt the top and bottom line, but its cost structure is far more desirable than a direct miner, and the November dividend hike shows it's holding up well. Thus, the share price decline last year and early this year could be a case of investors throwing out the baby with the bathwater.

The next billion-dollar iSecret

The world's biggest tech company forgot to show you something at its recent event, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here .

The article Why Royal Gold, Inc. Shares Fell 18% in January originally appeared on Fool.com.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

Copyright © 1995 - 2016 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

RGLD

Other Topics

Stocks

Latest Markets Videos

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More