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The Safest Way to Invest in Resource Stocks

Let’s talk about royalties…

No… not the kind that The Rolling Stones get every time their songs are played on the radio. I’m talking about the royalty payments that mining stocks receive in return for participating in a new venture.

Specifically, these companies receive royalty payments for investing in a project, but aren’t directly involved in the day-to-day operations or management.

Right off the bat, that removes a ton of risk. Especially when you consider that the capital needed to set up and run an operation can cost many millions, or even billions, of dollars. Better for someone else to shoulder that burden, right?

In addition, a royalty company doesn’t have to contend with political holdups, price fluctuations and a host of other factors that can impact production – and the ultimate success or failure of a project.

The downside? Well, a royalty company receives a smaller (but ongoing) payment. After all, if the mine is a major success, the company that takes all the risk should receive the lion’s share of the profits.

But if a royalty company is well-diversified and has interests in many properties, the risk is spread out and the revenue streams are more consistent.

Let me give you an example – and show you how these royalty companies work and why you should look at them as an alternative to miners.

Prepping for Profits

During the recent gold and silver collapse, royalty companies have outperformed their mining counterparts. Companies like Franco Nevada Corp (FNV) have fallen in price, but are only down around 20% to 25% from their highs. While mining stocks have dropped 50% to 70%. For FNV, the money keeps flowing in, albeit at a lower rate.

Here at Oil & Energy Daily, of course, we’re not content with simply finding the “best losers.” That’s why I was in Turkey last week, visiting with a micro-cap mining company that has interests in two potentially lucrative operations there.

In short, the company is a prospector. Using one of the best geology teams in the world, it seeks out the most lucrative properties. It then does all the legwork – for example, locking up the leases, drilling for test samples, and dealing with local governments and the local population.

It basically prepares properties for larger companies to come in and actually build the operations and run the project. In return, the company receives a royalty of 2.5% (or more) from the resources that are extracted. And on terms that can be from 10 to 20 years, or for the life of the mine.

Some of its partners include Newmont Mining (NEM), Vale (VALE) and Freeport McMoRan (FCX). And in many cases, these bigger companies help split the test drilling costs. They love the arrangement, as they get access to mines or properties that they haven’t been able to find or explore. They pay an upfront amount for that right, and then pay royalties over time. In the long run, it’s cheaper for them to outsource.

150 Chances to Win

The key takeaway here is that royalty companies must have a large portfolio of properties that will ultimately contribute to the bottom line.

In the case of the company I just visited, its portfolio boasts 150 projects in which it has an interest.

Not all of these 150 properties will prove successful, of course. But even if just a handful work out, it could result in millions of dollars per month in royalty payments. For a company with a market cap less than $100 million, that’s significant.

Plus, there’s always the possibility that the company strikes it really big at one or more of its properties and receives a much bigger payoff in the end.

In fact, I’m so bullish on its prospects that I’ve added it to our Oil & Energy Confidential Portfolio. Obviously, I can’t reveal its identity here, but if you want the full story, call our Trading Services Team at 888.570.9830 or 410.454.0498 between 9 AM and 5 PM EST.

Either way, if you’re looking at the resource sector and wondering how you should play it, then look at royalty companies. They may not make the biggest news with new discoveries, but they could give you a much less bumpy ride in a sector that’s notorious for its volatility.

And “the chase” continues,

Karim Rahemtulla