Gold Royalty Companies Report a Strong First Quarter

A month is all it took to wipe out a decade of jobs growth.

U.S. employers cut an unprecedented 20.5 million jobs in April, the most in history, while the unemployment rate rocketed up to 14.7 percent. As of this week, a head-spinning 33.5 million Americans, or one out of every five workers in the U.S. labor force, have lost their jobs as a result of coronavirus lockdown measures.

With so many people out of work as we head into the second quarter, the next earnings season for S&P 500 companies is undoubtedly going to be one for the history books. FactSet reports that Wall Street analysts have already cut their second-quarter earnings estimates by 28.4 percent, the largest such decline on record.

Meanwhile, we’re seeing corporations file for bankruptcy protection at an accelerated clip. As of May 7, an estimated 78 public and private firms with liabilities greater than $50 million have declared bankruptcy so far in 2020, including iconic brands J.Crew and Neiman Marcus. This puts businesses on track to meet and even surpass the 271 bankruptcies that occurred in 2009.

Negative Rates in the U.S.?

Against this backdrop, yields on the two-year and five-year Treasury fell to fresh record lows today as the fed funds futures market continues to price in negative interest rates by early 2021.

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If you recall, Alan Greenspan himself, former Federal Reserve chairman, said it was “only a matter of time” before negative rates spread to the U.S. That was back in September.

Greenspan’s prediction may well come true sooner than even he expected. With the two-year Treasury yield dipping to an anemic 10 basis points, the next test is 0 percent (or less!).

And remember, this is the nominal yield. Adjusted for inflation, it’s already turned negative.

Record Inflows Into Gold-Backed ETFs

To be clear, I’m not advocating for or in favor of negative U.S. rates. As others have pointed out, subzero rates don’t guarantee an economic recovery. They haven’t appeared to help the Japanese or European economies in any way. Instead, they only seem to punish people with savings accounts, forcing them to spend their money or else see their balances slowly melt away.

I believe this is a huge contributor to why we’re seeing higher gold prices right now. The yellow metal has surged above $1,700 an ounce, trading at nearly $1,710 today, or 34 percent above its per-ounce price a year ago.

Yes, gold doesn’t pay dividends or interest, but then neither do Treasury bonds right now. And with S&P 500 companies losing revenue, an estimated $37 billion in dividends could be cut or suspended this year. Royal Dutch Shell recently cut its dividend for the first time since World War II. This week, Disney became the latest blue-chip to suspend its dividend, despite the runaway success of its new streaming platform, Disney+.

Meanwhile, gold royalty company Franco-Nevada raised its quarterly dividend 4 percent, from $0.25 per share to $0.26 per share, marking the 13th annual consecutive dividend increase.

Rising investor appetite for gold is reflected in the fact that assets under management (AUM) in global gold-backed ETFs reached a new record high in April, according to World Gold Council (WGC) data. AUM stood at $184 billion as of April 30, with holdings also hitting a new all-time high of 3,355 metric tons. Assets in such ETFs grew in 11 of the 12 previous months, adding 80 percent to total AUM.      

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Although demand for gold jewelry has been negatively impacted by the COVID-19 crisis, “history suggests that the likely strength of investment demand may offset this weakness,” the WGC writes in its April report.

Gold Royalty Companies Report $400 Million in Free Cash Flow

For more than a couple of months now, I’ve said that gold mining companies will have a strong first (and second) quarter thanks to higher metal prices. Stock prices, as you know, are largely driven by revenues and free cash flow (FCF).

FCF is what companies have in the bank after paying operating costs, taxes and other expenses. The higher the cash flow, the better the company can expand its business and reward shareholders.

Longtime readers of the Investor Alert and Frank Talk are probably aware that we like gold royalty companies here at U.S. Global Investors, and in the first quarter of 2020, the “big three” royalty names—Wheaton Precious Metals, Franco-Nevada and Royal Gold—collectively generated a remarkable $402 million in positive free cash flow.

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Looking ahead, Raymond James analysts project Franco-Nevada delivering earnings per share (EPS) of $1.91, up from $1.82 in 2019. If Bank of America is right and the price of gold rises to $3,000 an ounce in the next 18 months, Franco’s EPS could be as much as $2.29, according to Raymond James.

As for Royal Gold, Raymond James rates the company as Outperform, seeing EPS of $2.90 this year, up from $1.48 last year. The company’s “high-margin metal sales” can be expanded with “minimal” general and administrative costs, analysts Brian MacArthur and Chris Law write, adding that Royal Gold has a “high-quality, diversified asset base in lower-risk jurisdictions, as well as a flexible balance sheet to support future investments and a growing dividend.”

Curious to learn more about gold royalty companies? Just email us at [email protected] with the subject line “Seeking Info on Gold Royalty Companies.”


Gold Market

This week spot gold closed at $1,702.70, up $2.28 per ounce, or 0.13 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 5.14 percent. The S&P/TSX Venture Index came in up 4.02 percent. The U.S. Trade-Weighted Dollar rose 0.68 percent.

Date Event Survey Actual Prior
May-4 Durable Goods Orders -14.4% -14.7% -14.4%
May-6 ADP Employment Change -20,550k -20,236k -149k
May-7 Initial Jobless Claims 3,000k 3,169k 3,846k
May-8 Change in Nonfarm Payrolls -22,000k -20,500k -870k
May-12 CPI YoY 0.4% 1.5%
May-13 PPI Final Demand YoY -0.3% 0.7%
May-14 Germany CPI YoY 0.8% 0.8%
May-14 Initial Jobless Claims 2,500k 3,169k
May-14 China Retail Sales -5.9% -15.8%


  • The best performing metal this week was silver, up 3.34 percent. Gold rebounded on Thursday to steady around $1,700 an ounce as economic data worsened. Unemployment surged to nearly 15 percent in the U.S. Bloomberg notes that the number of Americans filing for unemployment was above 3 million for the seventh straight week, boosting demand for havens as the economic situation continues to deteriorate. According to Bloomberg data, holdings in gold-backed ETFs surged about 3,000 tons to an all-time high this week. Inflows in 2020 so far have already surpassed the volume added in all of 2019.

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  • South Africa’s Rand Refinery Ltd., Africa’s largest refinery, said it is restarting gold smelting as the country eases a national lockdown. Rand’s CEO Praveen Baijnath said, “We have established a good routine and have been able to ensure that product from our mining clients is shipped to us and that refined product makes its way to bullion banks and end user customers.” Swiss refineries are also ramping up production, which should ease supply concerns that caused gold prices to diverge widely in April.
  • Traders are pricing in the possibility that the Federal Reserve will cut its policy rate to below zero by early 2021. This could bode well for gold, as it historically has an inverse relationship with rates. Chinese buyers of gold mining projects took their second bite at the apple this year with Shandong Gold Mining agreeing to buy TMAC Resources at a 52 percent premium to its 20-day trailing average price.  A new milling and treatment plant are likely needed to process the TMAC ores as their original engineering design had failed to economically recover enough gold from the circuit. This transaction follows on the heels of Silvercorp’s takeout offer for Guyana Goldfields, another failed project with improper mine planning and engineering design; taken under by braver soul.


  • The worst performing metal this week was palladium, down 1.34 percent despite hedge fund managers raising their net bullish positioning and Bank of America Merrill Lynch forecasting a deficit now for both palladium and platinum on reduced South African supplies. Spot gold trading fell in April due to market disruptions and a disconnect between prices in London and New York. According to the London Bullion Market Association (LBMA), trading volumes fell to 743.5 million ounces last month, down from 1.33 billion in March. Bloomberg notes that trading should return to normal in May as major refineries ramp up projection.
  • Swiss refiner Valcambi SA tried for five days straight in April to move a shipment of gold out of Hong Kong, reports Bloomberg. With global air travel at a standstill, the precious metals industry is searching for alternative ways to transport the metal. Limited flights are prioritizing protective equipment, medical items and food over bullion, according to Baskaran Narayanan, vice president of Brink Asia Pacific. India’s gold imports totaled just 60 kilograms in April, down from 13 tons in March. This is about a 99.5 percent drop as the coronavirus curbs air transport for gold.
  • Barrick Gold lowered is output forecast after running into a conflict with the government of Papua New Guinea. About 5 percent of the miner’s production comes from the Porgera gold mine in the country.


  • Mawson Resources said that it has tripled the size of its Sunday Creek gold project in Australia. The company said its plans to commence geophysical surveys followed by diamond drilling during the second half of this year. Americas Gold and Silver announced a C$25 million bought deal offering. Bloomberg reports that investors led by Pierre Lassonde and Eric Sprott have said they intend to subscribe for shares in the offering totaling C$8.75 million.
  • RBC Capital Markets has raised its outlook for gold. Their base-case outlook that has a 50 percent probability is that gold will average $1,663 for 2020 and that the fourth quarter will be the strongest. The high scenario, with a 40 percent probability, is that gold could average $1,788 an ounce, up from prior estimates of $1,614.
  • Paul Tudor Jones is buying bitcoin as a hedge against financial instability and money printing. Jones said bitcoin “reminds me of gold when I first got into the business in 1976.” The investor said he remains a big fan of gold and predicts it could rally to $2,400 an ounce or even $6,700 “if we went back to the 1980 extremes,” reports Bloomberg.


  • According to Morgan Stanley analysts including Christopher Nicolson, the plans of South African platinum-group miners to ramp up output could depress prices due to weaker automaker demand. “We see the PGM market moving closer to balance in 2021-22. Given the simultaneous disruption to both supply and demand, the 2020 market balance has become somewhat of a moving target.” Car demand has been hit drastically due to the coronavirus-induced economic harm.
  • HSBC reported a $1 million loss in metals trading revenue in the first quarter, compared with a $38 million profit for the same period last year. The bank said that it decreased due to “market volatility and unfavorable valuation adjustments on exchange for physical transactions.” Bloomberg reports that the bank cited in a filing “delivery disruptions in the gold market” as one reason why it breached its value-at-risk limits 12 times in March. HSBC normally only expects this to occur two or three times a year.
  • Although the worst of the coronavirus might have already been seen, as more economies reopen more cases and deaths are likely to occur. Internal leaked documents showed the Trump administration projects about 3,000 daily deaths in the U.S. by early June according to the Centers for Disease Control and Prevention (CDC). As President Trump pushes states to ease restrictions to get businesses back up and running, the CDC warns that “there remains a large number of countries whose burden continues to grow.” National Economic Council Director Larry Kudlow said a second wave of Covid-19 will not require a shutdown. Currently the U.S. government, across all agencies, approximates the cost of a single human life at $10 million.  Unfortunately, we have to live with the choice of how many lives we can save versus how much economic damage is inflicted on society, a sobering calculation.


Index Summary

  • The major market indices finished up this week. The Dow Jones Industrial Average gained 2.56 percent. The S&P 500 Stock Index rose 3.50 percent, while the Nasdaq Composite climbed 6.00 percent. The Russell 2000 small capitalization index gained 5.49 percent this week.
  • The Hang Seng Composite lost 0.63 percent this week; while Taiwan was up 1.20 percent and the KOSPI fell 0.09 percent.
  • The 10-year Treasury bond yield rose 6 basis points to 0.679 percent.


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May 8, 2020

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors