Avoid gold mining stocks, buy royalty and streaming ones instead
Gold price has been in a strong bull run this year and analysts believe that it has more room to go. It initially jumped to a record high of $2,431 in April and then pulled back to $2,320.
Gold has strong fundamentals to continue rising. Inflation in the US has remained being sticky in the past few months, with the headline Consumer Price Index (CPI) sitting at 3.5% and the PCE figure being at 2.5%.
At the same time, US public debt has continued surging and is now approaching the $34.7 trillion level. The debt is soaring by over $1 trillion every 115 days and the CBO has warned that it will get to $50 trillion in the next decade.
Central banks are also buying gold at the fastest level in years. This includes central banks in countries like China, Kazakhstan, Turkey, and Russia.
Gold mining stocks are lagging
Still, despite these events, gold mining stocks are not doing well. Barrick Gold’s stock has dropped by 13% from its highest point this year. The VanEck Gold Miners ETF (GDX) ETF has risen by less than 6% this year.
This performance is likely because gold mining is becoming difficult and expensive. For example, Barrick Gold’s revenue rose slightly to over $11 billion in 2023 while its net profit came in at $1.47 billion. In 2019, its revenue was $9.7 billion while its profit came in at $3.9 billion.
Gold mining companies are having to deal with higher labor costs, deeper gold reserves, and higher energy costs. This trend is accelerating as the number of new mines continue falling.
Like other mining firms, they are also facing longer regulatory approval time, which is impacting supplies. A study by S&P Global showed that discovery to production averages over 15 years.
Gold streaming stocks are better
Therefore, in line with this, I believe that investors should avoid gold mining stocks even when the price of gold surges.
Instead, they should focus on gold streaming and rights companies instead. These are firms that benefit when the price of gold is doing without mining the metal at all.
Instead, they provide initial capital to gold mining companies and then generate revenue throughout the life of the mine.
As a result, these firms tend to generate higher profits and pay higher dividends than gold mining companies. They also employ fewer workers than miners and have an asset-lighter model.
For example, Wheaton Precious Metals has a gross profit margin of 77.54% and a net profit margin of 52%. In contrast, Barrick Gold has a gross margin of 31% and a net profit margin of 12.5%.
Other gold streaming companies generate stronger results. Sandstorm (SAND) has gross margins of 84% and an EBITDA margin of 78%. Royal Gold has a net profit margin of over 40%.
GDX vs WPM vs FNV vs SAND vs GOLD vs NEM
As shown above, Wheaton, Royal Gold, Franco Nevada, and Sandstorm have outperformed mining companies like Barrick Gold and Newmont by far in the past five years. The same trend has happened in most previous periods.
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