The next echelon to solidify our ‘Portfolio Pyramid’ is the ‘Core’. Before we begin a couple of housekeeping rules. The ‘Core’ is comprised of risk-averse investments such as selective stocks, bonds or tax liens. The ‘Core’ portion of your portfolio is not for day trading. They are should be held within the ‘Portfolio Pyramid’ for durations longer than 5 years.
To keep ‘Core’ simple just remember that the company should be able to pass the 5-year rule. Meaning: if you bought the stock today, you would feel relative at ease not looking at the stock price for the next 5 years. Yes, these companies do exist. The ‘Core’ presents leverage to a Natural Resource. These companies tend to have some the following characteristics:
* A Low Beta (meaning low volatility against a given index)
* Royalty Companies
* Streaming Companies
* Bridge and or Mezzanine Companies
* Pay a Dividend
* Serially Successful Management
* Strong Business Plan
* Usually low operating expenses
Let us define some companies that fulfill the ‘Core – Pt.1′ position, they are Royalty and Streaming Companies. A Royalty Company will provide a company the capital (loan it needs to become operational) to fund a project. Once the company, in this example a Mining Company, is operational and selling Gold, Silver, etc. it will have to repay the loan. The mining company, once operations will have to pay a percentage of its earnings to the Royalty Company. The Royalty payment will last for the life of the mine as a repayment of the loan.
Compared to a Streaming Company, as it receives the actual Gold, Silver at a reduced price from the mining company for life of the mine. Then the Streaming Company sells the Gold, Silver etc. in the Open Market. The Royalty and or Streaming Company are not Miners they are only lenders. They are the beneficiaries from the production by the Mining Companies in different capacities. So the loan repayment is long and can be quite profitable.
The Royalty and Streaming companies streamline their prospective clients. They are not passively providing capital to just any the Mining Company. The Mining Company must earn the capital through a set of strenuous guidelines. The loan structure between a Mining Company and or Royalty/Stream is a win-win proposition. The Mining Company is able to pay the loan over the life of the mine without issuing more shares. The Royalty Company will receive payments from the Gold, Silver, etc. sold by the Mining Company without cost of mining. And the Streaming Company will receive rights to the buy at a fraction of the cost Gold, Silver, etc., without the cost of mining.
Recently, I was on the phone with Investor Relations with a Streaming Company that is in my ‘Core’ and they shared the following. The Streaming Company has All-In Sustaining Costs (AISC) of roughly $5 an oz. (meaning that after all expenses it costs this company roughly $5 to get Silver out of the ground). This is a 66% discount to the current price of Silver (that is not a typo). If the AISC is below spot price a Royalty, Streaming, or Mining Company should be able to make a profit and continue operations. There is more to take into consideration than just AISC, but it is a good indicator. Furthermore, for each share owned the company has 6 oz. in the Treasury! So let’s Review the merits and value proposition of this Streaming Company:
* The cost of Silver at this writing is $15.30
* The cost for this Streaming Company to get Silver out of the ground is $5.00
* The stock is selling below $17.50
* Pays a Dividend of 1.1% (nothing to get excited about)
* And for each share you own the Streaming Company has 6 ounces in the Treasury
* This is a Streaming Company that means they get the rights to the Natural Resource (Silver)
* So they are getting the Silver out of the ground at $5 (a 66% discount) and are currently selling at a profit, but are allocating a portion of their Stream and will sell when the price of Silver increases to say $30.00, $40.00 or $50.00
* Has a Market Cap ($ of the stock *# of shares outstanding) =7.5 Billion
* Stock Symbol: SLW
* Website: http://silverwheaton.com/
A Royalty Company in my ‘Core’ is earning Royalties and Streaming in Gold, Platinum Group Metals, and Oil & Gas. Their ratios are just as generous as ratios listed in the Streaming Company above. The price of gold is $1180 at this writing. This company is Streaming Gold at $400. The AISC recently were $821. Additionally, they are receiving a 4% Net Smelter Return Royalty/net profits interest royalty. At the present, I do not have the most up to date information confirming how much Gold they have in the Treasury per share owned. The company is selling below $62.00.
* The cost of Gold is at this writing is $1230
* The cost for this Hybrid Royalty/Streaming company to get Gold out of the ground is $821
* The stock is selling in the low $60’s
* Pays a dividend of about 1.7% (nothing to get excited about)
* Has Streams allowing the purchase of gold $400
* Has Royalties on Gold at 4%
* Has a Market Cap ($ of the stock * # of shares outstanding) =9.5 Billion
* Stock Symbol: FNV
* Website: http://www.franco-nevada.com/
I love this company because Gold is the most expensive of the four most recognized Precious Metals. The leverage they provide to the Gold price is astounding! Keep in mind, they are not limited to Gold, remember they are just as profitable with Platinum/Palladium, and Oil & Gas. Irrespective of the price of Gold price, this company will be selling Gold at a substantial profit. Thus, making me the beneficiary as a shareholder.
I believe the prudent decision for an investor is to participate through Royalty and Streaming Companies in Gold. Compared against its contemporaries the price of Gold is the highest. As the Gold prices increases my dividends and share price will increase substantially. Although I will receive cash instead of Gold when I sell, I will use the currency to pay off my rental properties. Remember, that Gold and Silver are money, and cash is currency. If you have a fixed rate mortgage or car note this is a great place to use your profits to pay off your existing debt obligations.
From a valuation perspective the cost of Silver, Platinum, Palladium, is less than Gold. I would much rather focus my efforts on the accumulation on Silver, Platinum, and Palladium. These metals have high industrial demand. Good thing the common investor doesn’t understand the fundamentals on how or why they have to buy these metals. I love the elimination of competition. Noteworthy of mention, I love Gold. I will trade the white metals for the yellow metal once their respective ratio’s to Gold change.
In a recent interview I conduct with David Morgan of the ‘TheMorganReport.com’, Mr. Morgan sheds words of wisdom, by referencing ‘the goose that laid the golden egg’. Own the egg (bullion), and the goose that laid the egg (the best mining companies)!
Stay tuned for my next blog Core Pt.2 we will discuss Bridge and Mezzanine Financing Companies and Tax Liens. I promise you will not want to miss this! ! !
Credits: Rick Rule, David Morgan, David Smith, Chris Marchese, Mike Maloney, Tekoa Da Silva, John Embry, and Eric Sprott.
Full Disclosure: I wish I did, but I do not receive any monetary concessions from any companies listed. I am a proud shareholder of Silver Wheaton (Symbol: SLW) & Franco Nevada (Symbol: FNV).
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