That’s an eternity if you’re used to the price action we’ve seen over the previous year.
And in a stock market where the average holding period is under 6 months, even a whole year would be long enough to wipe the memories of almost everyone about this bull market in gold.
While we wait, it’s key to have a plan for how we’ll deal with the months ahead.
My plan: continue to build positions in high quality businesses. That’s about all you can do – but while the real excitement and fireworks tend to happen when the underlying metal prices are soaring, there’s some really interesting things that can happen even if the metals stay flat.
For example, I recently put together an update for a royalty company that’s in two of my paid portfolios.
The company was spun out from a miner – which as I note in my update:
“GP was pleased to see management spin out [this firm] directly to shareholders. Management could have sold the NSR to increase corporate wallets, so shareholders would have received only secondary exposure to the attractive NSR. Instead of being buried in the corporate books, the publicly traded royalty has a chance to reach full valuation, potentially 20X FCF multiple like Franco or Wheaton.”
This kind of spinout is not unusual. We have a handful of other spinouts in the portfolio – and historically, some of them have ended up being some of the most profitable companies to own.
These kinds of deals tend to be what I call “accretive.”
That’s a fancy word that basically just means: continually beneficial. That’s for a few reasons. The big one is that company insiders frequently get shares of the new spun out company too. So your interests are aligned with their interests.
Company leadership has to make lots of decisions on a day-to-day basis, so when you see leadership make a big decision that helps shareholders, it’s a sign that the company is extremely focused on being shareholder friendly.
It means the little decisions that don’t warrant a press release but that have an impact on the business will also likely be shareholder friendly.
The best part is that we haven’t had to do anything: we just periodically see one of our companies peel off a sector of its business and issue it as a new company to existing shareholders.
Royalty businesses in particular are ideal if you’re looking to settle your stomach. They have steady cash flows, built over the years by carefully adding royalties to their portfolios. Even the smallest royalties typically have a dozen or more projects on board.
That means they don’t have all-or-nothing exposure to one or two projects – like many small miners do. Even large miners tend to rely on big projects for the bulk of their cashflows.
If you’re looking for companies on the “calmer” side of the gold business, take a hard look at royalty businesses. They tend to be slower moving – but sometimes that’s a good thing.
Best,
Garrett Goggin, CFA, CMT
Lead Analyst and Founder, Golden Portfolio