Gold has hit new all-time highs again this week, so we will explore a slightly different angle on the gold market for today.
That said, I’m not suggesting we should all rush to buy gold right now — there’s always a risk when chasing what’s currently in the spotlight. However, gold has been a part of my portfolio for over two decades, and it’s helped stabilize things through some of the rougher patches without harming my overall returns. In fact, there were times when it provided stability, such as during 2011-2012. There’s a reason gold has been considered valuable for thousands of years, and it’s still regarded as “money” by much of the world.
The recent gold price surge is fueled by fear (the world might be in turmoil) and hope (the Fed will continue to cut rates). We can’t predict the future, but it always makes sense to hold some gold. Right now, gold makes up about 10% of my portfolio — roughly 7% in physical gold, with the remainder in gold equities, primarily in gold royalty companies.
It likely won’t surprise you to hear that the stock I’ve been eyeing this week is yet another gold royalty company. However, this one is a new name I have yet to mention.
For those unfamiliar with the term “gold royalty,” it’s relatively straightforward. Several gold companies in the public markets don’t actually mine gold. Instead, they act as financiers — they buy or acquire a share of the gold production from a mine, earning a percentage of the output from a specific plot of land, often for the long term.
The appeal of financing over direct mining is clear. Royalty companies benefit by only having exposure to top-line production without having to bear the costs associated with mining operations. They don’t have to worry about building a mine, fluctuating diesel prices, or labor expenses. These companies typically operate with minimal staff, hiring only a handful of people to manage the portfolio, scout for new royalty opportunities, and collect their share of the mined gold.
Two key factors determine the success of a royalty company. First, the company’s leverage to gold prices without facing the negative side of mining costs (i.e., no involvement in the mine’s operating expenses and usually little or no debt). Second, the expansion potential of the mines involved.
To start, gold price fluctuations are crucial. Royalty companies typically acquire royalties based on assumptions about the likelihood of a mine’s development, the expected price of the precious metal, and the potential output over time. Gold prices influence not just the value of the gold but also the mining company’s actions. If gold prices fall, mines may be shut down, or future projects may be delayed; conversely, if gold prices surge, production could be accelerated, generating higher-than-expected cash flows. However, because royalty companies are passive, they cannot dictate how miners operate, and many early-stage royalties on unbuilt mines might never prove valuable. In fact, large royalty companies often hold interests in numerous mines that will never be developed.
The second key factor is a mine’s potential for growth. Mining operations are usually planned based on a feasibility study that outlines a specific ore body to be mined over a set period. Royalty companies often invest in streaming deals for projects that seem likely to pay off in the short term or acquire royalties on properties without reserves, anticipating that exploration may reveal significant deposits later. Miners are motivated to develop economically viable operations but may not always maximize a mine’s potential. This is where royalty companies come in: they often invest in large areas where a smaller mine has been identified, and once the mine is operational, the mining company is incentivized to use the revenue to fund further exploration. This “exploration upside” can take years to materialize, but the potential rewards can be enormous.
A notable example is the Franco-Nevada investment in the Goldstrike mine in Nevada. In 1986, Franco-Nevada acquired 4% of the mine’s production for $2 million, long before it was bought by a larger company that expanded its exploration efforts. What started as a modest mine has become one of the world’s most significant gold operations, generating millions for Franco-Nevada. In 2021 alone, the Goldstrike mine contributed $25 million to Franco-Nevada’s revenue, and it still holds 50 million ounces in reserves, offering potential long-term returns. This deal is often cited as one of the best examples of a royalty investment, turning a relatively small initial investment into a billion-dollar success story. However, it took decades for its actual value to become apparent.
Such success naturally draws attention, and only some royalty investments have matched the remarkable returns of Goldstrike. However, the significant, diversified precious metals royalty companies have proven solid and long-term investments. They provide gold price leverage similar to miners but without the risk of going under when gold prices decline or suffering from squeezed profit margins that miners often face as operating costs rise.
Franco-Nevada (FNV) and Royal Gold (RGLD) are the two oldest and most established gold royalty companies, which began building their royalty portfolios in the late 1980s. The largest company in the sector is Wheaton Precious Metals (WPM). These companies have performed well in recent years alongside rising gold prices but are also highly valued now. Unless gold prices continue to surge, these stocks will not likely offer the same explosive growth they once did, so we are always on the lookout for other royalty companies that are undervalued or still in an earlier growth phase.
This is the inspiration behind our current search. The idea came from a teaser ad — no surprise there. The pitch comes from Garrett Goggin, who previously worked with John Doody as a Gold Stock Analyst and contributed to other mining newsletters at Stansberry. With MarketWise closing down Gold Stock Analyst, he’s launched his own publication under the Golden Portfolio brand.
This ad is for his entry-level service, Golden Portfolio IV, which offers two quarterly recommendations and updates for $189 per year. Here’s how he piques our interest in his latest ad:
As expected, Goggin is bullish on gold’s future and outlines six reasons for his optimism, which I’ll summarize:
- He predicts a “sluggish labor market” will prompt the Federal Reserve to cut interest rates, potentially driving gold prices up to $5,000 per ounce in the next 12 to 18 months.
- Goggin believes the “bubble of all bubbles” will burst, leading investors to “time-honored” assets like gold, which he sees as a reliable indicator of economic troubles. He argues that gold is already breaking out as it detects instability in the U.S. and the U.S. Dollar.
- He expects foreign investors to lose confidence in the U.S. Dollar, prompting a shift into gold as the dollar depreciates further.
- He predicts that cryptocurrencies will face declining confidence due to cyberattacks and hacking crises, leading investors to flock to gold for safety. Goggin notes that gold prices have already risen as investors seek protection from high inflation and the growing risk of conflict in the Middle East.
- According to Goggin, the U.S. election will contribute to further dollar debasement, regardless of the outcome. He suggests, “No matter who is in office, we’re in trouble… unless you’re into gold.”
- Rising government debt will likely trigger a financial crisis. Since gold and U.S. government debt have been historically correlated, Goggin argues that the increasing debt should prompt investors to buy gold.
While I don’t expect all of this to unfold as quickly as Goggin suggests — he sees gold reaching $5,000 per ounce within the next year or two — it’s certainly possible if investor sentiment shifts. Central banks are already buying gold, though individual investors in the U.S. haven’t yet joined the trend, and their participation could have a significant impact. Such a surge would likely coincide with a tough market for other popular stocks, so gold is often viewed as a “security blanket” for a stock portfolio.
That said, gold isn’t necessarily a perfect “hedge” for stocks. While it can offer protection, gold also tends to drop in price when panic strikes, such as during a crisis when investors are in “sell everything” mode. For example 2008, gold fell nearly 25%, with gold mining stocks suffering even more. However, gold’s price more than doubled in the 3-4 years following the 2008 financial crisis, driven by a lack of trust in the stock market, low interest rates, a potential U.S. debt default, and the unfolding Euro crisis.
And then Goggin gets into one particular stock pick that caught my attention:
Smaller royalty companies are often prime acquisition targets for more prominent players, so Goggin believes this one might also get bought out to secure its “crown jewel” asset. This trend isn’t new — we’ve seen a steady pattern of small royalty companies acquired by larger competitors. For example, Royal Gold’s purchase of International Royalty in 2010 was a landmark deal, followed by more recent acquisitions like Maverix Metals, acquired by Triple Flag in 2022, and Nomad Royalty, bought by Sandstorm Gold in the same year. Smaller players like Abitibi, Ely Gold, and Golden Valley merged with Gold Royalty Corp (GROY) in 2021.
So, what’s “Pangea”? It refers to a small company known as the “Organic Royalty Generator,” which operates under the name Orogen (traded as OGN.V in Canada and OGNRF OTC in the US). The company uses a “prospect generator” model. This approach involves identifying and staking claims in areas with discovery potential, conducting minimal exploration, and partnering with larger companies to develop these sites. In return, Orogen retains a royalty on the project rather than selling it outright.
This strategy isn’t new; other companies have pursued similar “prospect generation” approaches to organically build royalty portfolios. However, creating a purely prospect-generation-based royalty company has historically been challenging. Companies often face pressure to grow faster than the organic model allows, leading them to acquire “inorganic” royalties on other projects, complicating their original narrative. Still, the model can succeed with good prospects, patience, and luck.
As for Orogen’s story, the company was formed in 2020 through the merger of Renaissance Gold and Evrim Resources. Renaissance brought a valuable royalty on the Silicon/Merlin project, while Evrim contributed its royalty on the Ermitaño project. These two royalties remain the company’s primary focus, though they also hold several other early-stage prospects. Since the merger, Orogen has seen significant progress — notably, the Ermitaño project has begun generating cash flow. Here’s how Orogen described its vision at the time of its founding four years ago:
And here’s what the stock has done since that August 2020 merger… that yellow line represents their revenue, mostly from the startup of the Ermitaño mine:
Since the merger, gold prices have risen by approximately 30%, while the stock has surged over 300%, garnering some attention from investors. But is this enough, and could it still be undervalued?
The company is engaged in active exploration with partners on about six projects, yet its market cap remains around $200 million. New discoveries could potentially boost the stock, but these projects are still in the early exploration stages. None of them have proven reserves or resources, nor have they reached the stage of preliminary economic analysis, let alone feasibility studies, which precede permitting and financing efforts for mine development.
Over the next five years, the company’s cash flow is expected to rely heavily on the Ermitaño mine. Beyond that, the focus shifts to the Expanded Silicon project, which Goggin references when discussing the significant “Wizard” discovery. This project includes two deposits, Silicon and Merlin, explaining the “Wizard” nickname.
AngloGold Ashanti (AU), a large miner with a $12 billion market cap, owns the Expanded Silicon project. Their plan involves starting production on deposits near but outside Orogen’s royalty area in the next few years, eventually expanding the mining district. Silicon will likely be second in line for development. Goggin speculates that production within Orogen’s royalty area might begin in about five years. However, these deposits are still early in development, with no feasibility studies or defined reserves yet. The first official resource statement was only released last year.
Interestingly, this connects with another royalty company, Renaissance Gold, which partnered with Callinan Royalties over a decade ago to stake the Silicon deposit. After Callinan’s acquisition by Altius Minerals (ALS.TO, ATUSF), Altius retained a 1.5% NSR royalty on the project, and the 1% NSR is now held by Orogen. Altius considers Silicon and Gunnison copper mine among their most advanced “Development” projects.
If Goggin’s estimate holds, the Silicon/Merlin mine could generate $20 million annually for Orogen once it’s operational or significantly more if gold prices rise. Valuations for royalty companies often hover around 20X operating cash flow, a metric frequently used to price such companies. However, production at Silicon might still be a decade away, depending on AngloGold Ashanti’s development timeline and gold price trends, factors entirely out of Orogen’s control.
The “Wizard” royalty undoubtedly holds value and could anchor a central gold-producing district in the future. This prospect aligns with the ambition of discovering the next major mine, like Goldstrike. For patient investors, the potential may justify holding the stock, although there’s no guarantee royalties from Silicon/Merlin will materialize before 2030.
Given the current excitement surrounding such opportunities, valuations have climbed. Orogen now has a market cap of $220 million, roughly 30–40X its projected revenue for this year.
If you believe Goggin’s speculation that the 1% Silicon royalty could eventually be worth $382 million, this valuation also implies significant potential for Altius Minerals. With its 1.5% royalty on the project, Altius’s stake could be valued at close to $600 million.
Here’s my admission: I have not historically attributed much value to the Silicon royalty. This view led me to gradually reduce my stake in Altius Minerals over the past few years, and I no longer hold shares. That said, I do believe Altius, with its $900 million valuation, offers a less risky avenue to gain exposure to the “Wizard” mine compared to Orogen Royalties at $200 million. Altius is less dependent on “Wizard” and holds royalties in base metals and fertilizer rather than gold, which typically makes it less appealing to some investors. However, if copper, iron ore, and potash prices remain stable, Altius could generate roughly $50 million in annual operating cash flow from its ten producing royalties while awaiting developments at Silicon, Gunnison Copper, or perhaps Kami Iron Ore and Curipamba Copper in the future.
For Orogen, funding its operations while waiting for AngloGold Ashanti to develop the Silicon mine relies on its 2% NSR royalty from the Ermitaño mine in Mexico, operated by First Majestic Silver (AG). Ermitaño began production in late 2021, essentially serving as an extension of the nearby Santa Elena mine, utilizing much of the same infrastructure. Notably, Santa Elena previously provided significant royalty revenue for Sandstorm Gold (SAND), but this revenue diminished as production shifted to Ermitaño.
In 2023, Ermitaño brought in $5.9 million in royalty revenue for Orogen, a figure likely to increase in 2024 thanks to higher silver and gold prices, even if production slows slightly. Since Orogen doesn’t anticipate substantial revenue from other sources, Ermitaño’s royalties must cover all operational costs. Fortunately, with favorable gold prices, Ermitaño could generate around $5 million in cash flow this year, leaving some cushion for operational expenses.
This relatively positive outlook assumes stable gold prices around $2,500/oz, allowing Orogen to sustain $5 million in annual cash flow from Ermitaño. This cash flow could support operations while they await Silicon’s development or the advancement of one of their 15 other early-stage projects—eight managed by junior explorers, while seven remain open for partnerships.
There’s potential for improvement: Silicon’s development might accelerate, Ermitaño’s capacity could expand due to new discoveries on Orogen’s royalty lands, or a junior partner could be acquired by a larger company, expediting mine development. Conversely, the situation could deteriorate. Since Orogen’s portfolio largely hinges on two assets, adverse news from Ermitaño or delays in Silicon/Merlin development by AngloGold Ashanti could significantly affect Orogen’s valuation.
The good news is that Ermitaño’s outlook has improved. Although there were concerns about the mine’s limited lifespan, with reserves estimated to deplete by 2027, First Majestic’s discovery of the Navidad system next door offers hope. This area, also on Orogen’s royalty land, is in the early discovery phase and can extend mine operations beyond the anticipated end-of-life date. Such an extension would benefit royalty holders like Orogen, allowing them to collect royalties for the entire duration of Navidad’s production without incurring additional costs. As seen with Sandstorm’s deal on Santa Elena, initial estimates often fall short of actual mine life, providing years of extra revenue.
This is a reasonable speculative play on optionality and exploration potential, particularly if Orogen becomes an acquisition target for one of the larger royalty firms seeking to expand its portfolio in the coming years. However, with a current valuation exceeding $200 million—bolstered by higher gold prices driving their Ermitaño royalty and potential growth from the nearby Navidad deposit—it seems investors are already paying a substantial premium for the chance that the Silicon mine might eventually be developed over the next decade.
While some level of speculative investment is understandable, a more prudent option for those excited about the Silicon/Merlin prospects might be Altius Minerals. It presents a potentially safer opportunity with a more significant upside should this project evolve into an essential American gold mine by 2030.
Altius appears overvalued relative to its existing cash flow, and I’m not currently holding shares. I hoped to find a more straightforward and attractive smaller royalty company here. For context, I’ve previously sold my position in Altius, and despite the stock’s recent climb—possibly driven by optimism about rising potash and copper prices or enthusiasm for Silicon/Merlin—I remain cautious. The prospect of it becoming a project on par with Goldstrike decades from now certainly fuels investor interest.
Orogen appeals to those willing to act as venture capitalists in the gold mining sector. Their current exploration efforts and search for new prospects provide interesting options. However, even seasoned players like Altius have sometimes gone decades without seeing a staked prospect evolve into a mine or generate an “organic royalty.”
Organic royalty creation is a lengthy process. Chasing a company pursuing this path at a time when gold prices are at historic highs might be overly ambitious. While not unreasonable, at the current price, the investment seems to hinge on the likelihood of a surprise acquisition or the patience to wait at least five years—more likely a decade—for Silicon to potentially deliver significant royalties. Though the portfolio’s quality might justify such patience, investors seeking leveraged exposure to gold prices may find more secure options in established, growing gold royalty companies. These are less likely to experience severe losses from setbacks on individual development projects.
In the broader gold royalty landscape, there are prominent players to consider. Franco-Nevada held the “blue chip” status until last year’s closure of Cobre Panama, its most significant royalty, disrupted operations. Wheaton Precious Metals currently occupies this position:
Wheaton Precious Metals (WPM): While pricey by historical standards, the company is experiencing growth this year due to higher prices, even as production in gold-equivalent ounces may dip. They project a 40% increase in ounces over the next five years, equating to about 7% annual growth. However, this growth outlook comes at a premium valuation—trading at roughly 33 times cash flow from operations. Their portfolio is diversified across silver and platinum group metals, reflecting their evolution from their original focus as Silver Wheaton.
Franco-Nevada (FNV): Growth in production ounces may take some time to recover after the Cobre Panama closure, which wiped out approximately 20% of their cash flow. Despite diversification into oil, gas, silver, and platinum royalties, 75% of their portfolio remains precious metals. Their valuation currently stands at around 26 times cash flow, though they dipped closer to 20 times during the Cobre Panama fallout.
Royal Gold (RGLD): Offering the best risk/reward balance among the major players, Royal Gold maintains a robust history and a portfolio with promising development royalties. Approximately 75% of their output is gold, supplemented by silver and copper. They anticipate production growth of at least 10% next year, driven by critical properties. Royal Gold is positioned well with no significant debt and steady cash flow. Based on a projected cash flow of $475 million this year, they are valued at $144 per share, which currently leaves them slightly below that threshold.
Triple Flag (TFPM): Currently, the company is generating approximately $160 million in cash flow from operations. Analysts don’t expect immediate growth, but over the next five years, they forecast a 30% increase in gold ounce production. This would equate to a 5% annual increase in output, which could offer strong exposure to rising gold prices, should the upward trend continue. The company is currently valued at just over 20 times its cash flow, which seems reasonable considering the surge in gold prices. Being a newer player in the market, Triple Flag has solid operating royalties, but its collection of “potential future” royalties is relatively small.
Osisko Gold Royalties (OR): In the past, I’ve been hesitant to invest in Osisko due to their complex prospect generation business, which made it difficult to assess their spending. However, they have simplified their operations in recent years and are now focused on generating solid cash flow, which they primarily use to acquire new projects. They currently have about $145 million in operating cash flow, and this figure could rise to $170 million within a couple of years. With a valuation range in the low-$3 billion area, a price range of $16-17 seems reasonable (the stock is currently priced at $18). Like many others in the industry, Osisko is expected to see a 5-6% increase in ounces over the next five years.
Sandstorm Gold (SAND): Sandstorm is the gold stock I’ve held the longest, but it’s underperformed, and has been generally unpopular for the last couple of years. Much of this is due to CEO Nolan Watson’s overpayment for the Nomad acquisition, and the delays in several of their major projects. They are also burdened with debt from that acquisition, which is currently consuming much of their cash flow. However, ignoring the debt, Sandstorm is the most affordable of the major royalty companies, valued at just 13 times cash flow. When accounting for debt and enterprise value (to make comparisons with better-capitalized competitors), the stock still trades at around 16 times cash flow at its current price. While the stock has been recovering somewhat, I believe it remains discounted by 20-40% compared to its larger competitors. Sandstorm is more optimistic about its growth, projecting an increase in gold ounces from about 80,000 this year to 120-140,000 in five years. Some investors may be skeptical about this, particularly since a significant portion of this increase is expected to come from the Hod Maden project in Turkey, which has been delayed multiple times.
What’s the best strategy? I would still consider adding Sandstorm Gold to my portfolio, provided you’re willing to be patient. However, I believe Royal Gold presents the best combination of growth and valuation among the major gold royalty companies. Osisko Gold Royalties ranks second, with Triple Flag not far behind. Franco-Nevada and Wheaton remain too expensive for my liking. All of these companies should perform well if gold prices continue to rise above the $2,500 mark or approach the $5,000 per ounce prediction made by Goggin in the coming years.
I would like to see more from Orogen Royalties, but at its current price, it’s too speculative for my taste. If you’re considering speculation due to the potential of the Silicon/Merlin project, which could become significant in the next five to ten years, Altius Minerals might be a safer alternative. Though it is also slightly overvalued, Altius offers more stability, with solid current cash flow from its potash and copper operations.
The main reason to consider Orogen would be based on the belief that it could be acquired due to the potential of the Silicon/Merlin royalty. While it’s possible, given that takeovers have occurred in this industry (such as Sandstorm’s acquisition of Nomad), the relatively small portfolio of prospects and the single cash-flowing royalty make an acquisition unlikely.
That’s my take on things. I started this research hoping to buy another gold royalty company, but I ended up holding off. I’ll continue to monitor Orogen, though.
Do you have any favorite stocks to recommend, or thoughts on the future of gold? Feel free to share them in the comments below. Thanks for reading!
