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A Relative Valuation Analysis for Royalty and Streaming Companies

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Royalty and streaming companies

The business models of royalty and streaming companies are quite different than those of other precious metal miners (GDX) (SIL). Unlike other precious metal companies, royalty companies don’t own mines. They make upfront payments in return for the purchase of fixed percentages of future silver or gold mine production.

As mine owners deliver precious metals to royalty and streaming companies, additional payments are made to them. As such, their correlation to gold prices is lower than those for miners.

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Higher multiples

Due to their more stable income streams, royalty and streaming companies usually trade at a higher multiple than miners. As the above chart shows, they also enjoy higher EBITDA margins than their mining peers.

Out of four major streaming companies we’ll discuss in this article, Franco-Nevada (FNV) has the highest forward EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] multiple of 20.6x. The company’s new assets from Antamina are producing superior growth. Its balance sheet is also strong. Also, its diversified production base, strong pipeline, and robust balance sheet warrant a premium to its peers. It could rerate as investors look for safe and stable companies to play gold.

Silver Wheaton (SLW) is trading at a multiple of 16.3x. The discount to FNV is mainly due to flat production growth for the next few years. Although its leverage is low, its balance sheet may not be able to support a major acquisition going forward, which could restrict its growth options. Moreover, a taxation issue has overshadowed its valuation for quite a while. Any resolution to that could see a major rerating to the stock.

Rerating catalysts

Royal Gold (RGLD) has turned around dramatically in 2016. Its multiple has expanded from 10.7x at the start of the year to its current multiple of 15.1x, which is a 40% revision. The company has diversified significantly in the last one to two years. Another accretive acquisition could provide a further catalyst to the stock. Until then, the valuation could be more or less full.

Sandstorm Gold (SAND) is a smaller company compared to its peers, and it’s trading at the lowest relative multiple of 12.2x. While it is smaller, its leverage to gold prices is higher than its peers. Even a small deal could alter its fundamentals significantly. This could also be a positive catalyst for its valuation.

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