Why invest in a Royalty company ?

Why invest in a Royalty Company? Here are some good reasons:

"Still looking for a good way to strike gold while investing in it? As gold moves solidly above $700 an ounce amid turbulence in the credit markets and on the back of a weak dollar, you don’t have to be a dyed-in-the-wool goldbug to see some merit in investing in the precious metal.
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An efficient way to do so would be with shares of Royal Gold Inc. (Nasdaq: RGLD), which bills itself as the world’s leading publicly traded precious metals royalty company. It’s an unusual company with an unusual business strategy. How many companies can you name that have a market cap of $875 million with only $48 million in annual revenue and 14 employees?

Royal Gold’s revenue consists of royalty payments based on its interests in mines operated by the world’s leading gold mining companies, making it a relatively pure play on gold. As the company puts it, its sliding-scale royalties provide investors with upside leverage when gold prices rise, as they are now, while providing a floor when gold prices fall.

Currently, the company—which traditionally has been based on a single mining complex in Nevada—faces the happy prospect of gold reaching a new 26-year high just as the company’s recent diversification in other mining projects is beginning to pay off with these mines coming on stream.

Denver-based Royal Gold more or less stumbled into the royalty business after the company, founded in 1981 as Royal Resources, abandoned oil and gas early on to become a gold mining company. The stock market crash of 1987, though, put a stop to that idea and the company realized it could invest in projects operated by others with much less risk. If a site doesn’t pan out, so to speak, Royal Gold still loses, but doesn’t have to worry about permit delays, rising operating costs or the myriad other factors that cut into an operating company’s margins when it does strike paydirt. Instead, it can sit back and wait until the mine starts pouring gold and then collect its royalty on the sale of it.

As a result, Royal Gold’s operating cash flow margin is 50%, compared with 19% for North American majors like Barrick Gold Corp. (NYSE: ABX), Newmont Mining Corp. (NYSE: NEM) and Goldcorp Inc. (NYSE: GG). Royal Gold’s net profit margin is 41%, compared with 11% for the majors.

Moreover, as the operating company seeks to maximize its return on a site, Royal Gold benefits from the additional reserves found through further exploration without having to contribute more capital. For instance, the Cortez mine in the Pipeline mining complex in Nevada began with reserves of 300,000 ounces in 1995, but had 2.3 million ounces of reserves at the end of 2006, even after production of 8.2 million ounces, because of new discoveries totaling 10.2 million ounces.

Royal Gold still derives 80% of its revenue from mines in Nevada, but that is due to change after its diversification into development sites in Mexico, Argentina, Chile and Burkina Faso in West Africa. The Taparko mine in Burkina Faso began pouring gold in July; Royal Gold hopes to begin seeing revenue from the project in the coming quarters. The Penasquito project in Mexico, which Royal Gold believes will be a major producer for two decades, is due to come on stream in the second half of calendar 2008.

In addition, Royal Gold is in the process of acquiring Battle Mountain, a smaller royalty company, which has four producing royalties and one development property, including the promising Dolores mine in Mexico, which is due to commence production early in calendar 2008."