We’ve discussed the pitfalls of investing in gold mining shares at length before. The junior miners are generally a sucker’s bet unless you know management (as we were fortunate to in the case of AuEx Ventures). And the larger miners have an inflation problem. Gold has been going up, but so has their input costs.
So are we to avoid companies in the sector altogether?
S&A’s Matt Badiali recommends gold royalty companies instead:
Gold royalty companies have a unique business. They are like loan sharks in the gold space. They give the mines cash – often well before the mine is in production – in exchange for a cut of the gold production.
They buy long-term gold contracts with miners… then show up every quarter to get paid.
Cost of drill steel rising? Fuel bills getting expensive? Miners’ union raising wages? No worries. They still get paid.
In other words, these companies are largely immune to the rising cost of mining gold.
Matt likes the aptly named Royalty Gold (RGLD) as a great example of this group. You can read his full analysis here (including a great chart of RGLD’s input costs).