By Andrey Dashkov, analyst, Casey Research
 |
When you hear the term “mining stocks,” what comes to mind?
Do you instantly yawn out of boredom?
Or do you immediately think of incredible volatility?
It’s understandable. On the surface, mining stocks don’t seem like the most exciting area of the market.
Not to mention, many mining companies start as risky, penny stocks before they graduate to a respectful, “small cap” status.
Because of this reputation, the mining industry has suffered from underinvestment for years.
But as the electric vehicle (EV) revolution accelerates, people are beginning to turn their attention to the mining sector.
For instance, the total revenue of the world’s top mining companies soared by 41% in 2021 compared to the previous year. This year, it’ll grow by another 12% – to over $1 trillion.
So right now, the mining industry is expanding to produce “hard tech,” or the metals that go into EVs.
What’s more, one niche area in the mining space is delivering excellent gains.
In our Super Spike Advisory portfolio – Casey Research’s premium research service – it’s produced returns from 85% to 217% as of writing.
As investors look for companies with stable revenues, cash flows, and dividends at the end of 2022, we think stocks in this area are some of the best-positioned for next year.
And today, I’ll explain why the demand for their capital is poised to grow… and where you can look for them.
Royalty Companies Offer Less Risk Than Pure-Play Commodity Picks
Venture capital companies.
That’s what I’m referring to.
But what does venture capital have to do with mining?
Here’s how it works:
First, a royalty company acts as an investment fund or a venture capital fund.
It signs agreements with junior mining companies before they start producing commodities. It buys future production at a discount. In exchange, the mining company gets an investment infusion that helps it get to the production stage faster.
Everybody wins. The miner gets capital, which can be hard to obtain due to the high-risk nature of the sector, and the royalty (or streaming) company gets a bargain on the miner’s future output that it can later sell at market price.
In the post-2014 commodity bear market, royalty companies almost saved the mining industry.
Traditional ways of financing mining operations were drying up, which opened a window of opportunity for royalty companies.
They invested billions of dollars into junior mining companies and assembled diversified portfolios of assets.
McKinsey estimates that total royalty investments in 2020 were about $15 billion.
For example, Franco-Nevada – one of the largest royalty companies – has a portfolio of 404 assets. One hundred and twelve of them are producing mines, 42 are at the advanced exploration stage, and 250 are early-stage projects.
Really, the company looks more like an ETF than a stock.
And it’s this level of diversification that makes gold royalty companies a good entry point for mining investors.
These Companies Are Positioned for Growth
Over the past year, higher interest rates have made financing harder and more expensive to secure.
While that may seem like grim news, it’s also the perfect opening for royalty companies to step in and increase their share of the total mining finance.
Royalty financing still represents under 5% of the total investment volume in mining companies’ debt and equity…
…Leaving a lot of room for growth. In its Q3 press release, it mentions “an increase in demand for royalty and stream financing.”
Another reason why I expect royalty financing to take off is the growing deficit of critical minerals, such as copper or lithium.
For example, a forecast prepared by Boston Consulting Group says that by 2035, the gap between lithium demand and supply will widen to 24%.
Now more than ever, we are in dire need of the metals powering the green energy revolution.
As this demand increases, so will the demand for royalty companies’ capital. So while we navigate a new era of energy, royalty companies will remain at the forefront of mining financing, and prove to be some of the best investments in the space.
To get exposure to this sector, consider the U.S. Global GO GOLD and Precious Metal Miners ETF (GOAU). It holds a portfolio of both mining and royalty companies.
And to learn about which specific royalty companies we cover in the Super Spike Advisory portfolio, go here.
Good investing,
 |
Andrey Dashkov
Analyst, Casey Research