Our logo is a prospector holding up a gold nugget he discovered. It’s what my Dad focused on, and what we’re primarily focused on here: the possibility, and excitement, of discovery. It includes those “advanced explorers” that are trying to discover more ounces to grow their deposits.

But those aren’t the only kind of mining companies that can be winners. And of course, betting on a discovery is admittedly risky (though there are definite ways to reduce the risk—see the Battleship strategy beginning page 124 in PAYDIRT).

Maybe some mining investors would like to take less risk—and yet they’d still like to beat the industry index.

The good news is, there is a way to do that.

Royalty companies.

We initially balked at adding them—they’re not the ones making a discovery—but then we realized they do fit our mission statement. And frankly, we’d like to provide a more diversified approach to investing in this sector, especially if it can reduce some of the risk and yet still provide more upside than a mining ETF. So, we decided to add the category.

But there was an immediate problem. Royalty companies are known for being overvalued, some even in the current environment. And the “big four” as I like to call them, usually won’t beat the industry’s royalty ETF—they are the ETF, over a third of it.

I do like the Big Four, by the way…

• Franco-Nevada was founded by Pierre Lassonde, the father of the royalty model (who’s since retired). I interviewed him right after FNV launched and I distinctly remember him telling me, “Jeff, I promise you this stock is going to go 10x.” It’s done that and more—it launched around US$15 and has been over $200 multiple times since.
• Wheaton Precious Metals has turned into a royalty and streaming behemoth and is wildly profitable. Randy Smallwood, who we had a conference with during the dark days of 2008-09 (the company was called Silver Wheaton then), has been at the helm since inception. WPM has also gone 10x.
• Royal Gold has been around a while too, and its founder Stanley Dempsey was inducted into the National Mining Hall of Fame in 2016.
• And Sandstorm Gold, run by PAYDIRT contributor Nolan Watson, is the youngest of the bunch but leading a company that’s growing fast and hard.

These companies will do fine in my opinion in the next gold and silver run. And they do offer lower risk than an explorer.

But again, we don’t just want low risk, we also want bigger upside potential, companies that are likely to outperform what the sector itself does.

And there’s a specific strategy to do that with royalty companies, beyond just looking for those that are undervalued:

• Big revenue growth on tap.

A big jump in cash flow from new royalty payments can have a big impact on the company’s bottom line—and its stock price. We don’t mean revenue growth of 10% or 20%, but 100% or 200%. That’s the kind of jump in cash flow that can light a fire under a stock. And this is more likely to come from a small or medium-sized company, not the big ones.

Of course, these companies still must pass all the criteria we outlined in the book. If they do, and their royalty revenue is about to grow substantially over the next 1-2 years, we might have an attractive value proposition.

This will exclude new companies or those that don’t have many royalty agreements. We’re looking for companies that already have a track record of being able to secure royalties but have not yet seen big cash flow kick in.

There’s only a handful of these. There may be more later, but for now there’s only a few that meet these qualifications. This is who we’re focused on.

We’re introducing one, August 22. Our feature analyst Jeff Valks walks us through our new pick, an exciting write-up about a royalty company with a proprietary database that will conservatively see their revenue double in the next two years, royalties from “generational” mines that are coming online, with a deeply undervalued stock to boot…

Sign Up for The Gold Advisor Newsletter to see the recommendation