Two Overlooked Streaming Stocks With Huge Upside Potential

TM Editors Note: This article discusses a penny stock and/or microcap. Such stocks are easily manipulated; do your own careful due diligence.

Streaming/royalty stocks have been darlings of the commodity investment world. In the precious metals sector, this type of company provides financing for mining companies in the form of an upfront cash payment in exchange for a percentage of production or revenues from the mine. Jason Hamlin of Gold Stock Bull profiles two streamers often overlooked by investors.

AuRico Metals Property Locations

The main difference between a streaming company and royalty company is that a royalty is cash paid as a percentage of revenue, while a stream involves the actual delivery of physical metal to the holder of the streaming agreement. The finance model has also been called a volumetric production payment transaction and originated in the oil and gas sector.

Advantages of the Streaming/Royalty Model

There are considerable advantages of a streaming/royalty business model including:

1) Diversification—A streaming company has agreements with multiple miners, thus spreading and mitigating any potential risk. The larger companies have dozens of deals and multiple income streams.

2) Unlimited Upside Potential—Since the deals they secure are usually for a percentage of the mine’s production for life, the streaming company stands to benefit immensely if new zones are discovered and actual production comes in higher than originally forecasted. This occurs all of the time in the industry, as drilling delineates new resources, either increasing annual production or vastly extending the life of the mine.

3) Limited Downside Risk—While a miner may see profit margins squeezed as the cost of production rises, the streaming company typically has a contract for a percentage of the gold/silver production, thus eliminating the issue of rising costs. Royalties are paid out of top-line revenue before any operating expenses are accounted for. In addition, the contracts usually contain a number of provisions protecting the streaming company in the event of fraud, misrepresentation, etc. This is all on top of the considerable due diligence that is exercised before entering into any streaming deal.

4) Favorable Tax Treatment—Streamers enjoy a favorable tax situation courtesy of the Canadian government. As long as they reinvest their proceeds or pay it out as dividends, they are gifted with a tax rate in the neighborhood of 0–8%. That’s a huge advantage when it comes to net profit margin.

A few of the best-known streaming/royalty companies in the mining space are Franco-Nevada Corp. (FNV), Silver Wheaton Corp. (SLW) and Royal Gold Inc. (RGLD). These stocks have all performed well during the 2016 bounce in commodity prices, offering leverage to the underlying move of the metals. For example, while gold and silver are up around 20% year to date, the three stocks mentioned above are up 45–55% in the same time period.