- A compelling offer
- Who is the golden godfather?
- A less risky way to play it
Like every human being with
a pulse and half a brain, I’m a huge fan of the first two Godfather
movies. There are so many relevant
quotes and situations from these movies that speak to just about every aspect
Perhaps the best and most
quoted line is Michael Corleone’s explanation of how his father Vito, the
Godfather, was able to help with Johnny Fontane’s career. To refresh your memory, Johnny Fontane was a
Frank Sinatra archetype locked into a contract with a band leader. Johnny asked Vito to help him get out of the
short, the band leader released Johnny only after Vito “made him an offer he couldn’t refuse.”
The offer, of course, was
that Vito’s henchman Luca Brasi would kill the bandleader if he didn’t release
Johnny from the contract.
Now, the gold company I’m
going to talk about today has never threatened to kill someone – as far as I
know. But they’re known for making
offers that while not impossible to refuse, are quite difficult at least.
in this case is money. More
specifically, it’s investment capital. Now, if you’re like most people, you’ve probably never tried to get
financing for a new gold mine. To put it
mildly, it’s extremely difficult. Most
gold mining ventures never get an ounce of gold out of the ground. So, banks typically won’t loan money to such
risky companies. To add to the problem,
gold miners, fair or not, are perceived as untrustworthy individuals. That characterization might have something to
do with their ability to take large piles of startup capital and make it
disappear into a literal hole in the ground, all the while paying themselves a
handsome salary on someone else’s dime.
But let’s assume that
there’s a gold miner who is actually honest, and he has the expertise to bring
his deposit to fruition, and actually get the yellow stuff out of the hole in
the ground. It will still take upwards
of 10 years to bring one single ounce to market.
So whoever loans money to
this miner has to know a lot about gold mining, to make sure they’re not
funding another money pit, AND they have to be ready for a long and winding
road towards getting paid back.
Godfather of gold companies.
Picture a rosy-cheeked gold
miner walking into the dark office of this golden godfather, hat in hand. He’s got charts and maybe some initial
drilling surveys, maybe some pretty pictures of the property he already owns,
and some shiny equipment he needs.
He’s already been turned
down for loans from banks, hedge funds, venture capital investors and his
brother in law.
In short, he’ll take
investment capital, and give up pretty much anything – the prospect of mining
his gold makes him susceptible to offers he simply can’t refuse.
This godfather of gold
companies is called Royal Gold (Nasdaq:
RGLD). They loan money to startup
gold miners years and years before the gold gets out of the ground. Their offer? They’ll give lots of up-front investment capital in exchange for a
certain percentage of mined gold, or revenue from the mined gold. These payments, whether in gold or in revenue
are called royalties – and they usually work on a sliding scale. The higher the price of gold, the more of the
gold and/or revenues Royal Gold receives.
The most exciting part about
this company is that they don’t ever mine, explore, refine or smelt a single
ounce of gold. They have a dozen or so
employees, and they basically do nothing but lend money to gold miners, and
then collect royalties. Like the
Godfather, they just sit in their office and wait for desperate lackeys to come
in and accept un-refusable offers.
There are other godfathers,
but Royal Gold is the biggest, and it’s also the only one that focuses entirely
The company pays a small
dividend, currently less than 1%, but they have a long history of raising their
dividend – something I think shareholders can expect more of as the price of
Right now, the stock is
trading at a pretty rich valuation of 71 times earnings. It’s tough to convince yourself to buy a
stock with such a high PE, but if you wait for earnings to kick in, you could
miss some of the upside.
If this stock interests you,
I’d advise averaging in slowly as gold prices increase.
looking for a company that’s a little bit cheaper, I’d recommend taking a look
at a junior gold miner in the Small Cap
Investor Pro portfolio.
In the last quarter this
company received an average price of $1,119 per ounce of gold, and total cost
per ounce was only $425. That’s a $694 profit per ounce! These junior gold miners have the tendency to
skyrocket much faster than gold prices – AFTER gold prices rise. Click
here for the full story.