How Gold Royalties Offer Inflation-Resistant Gold Exposure
As rising inflation has increased the operational expenses of gold mining companies, gold royalty companies have emerged as an inflation-resistant alternative for investors seeking exposure to the precious metal.
Without exposure to rising wages, fuel, and energy costs, gold royalty companies are able to maintain strong profit margins that are often more than double those of gold mining companies.
This infographic sponsored by Gold Royalty is the first in a two-part series and showcases exactly how royalty companies naturally avoid inflation, along with the superior profit margins that come as a result.
Inflation’s Dampening Effect on Gold Mining Profits
Since mid-2021, inflation has become a constant risk-factor for investors to keep in mind as they manage their portfolio. Every energy fuel has risen in price over the last year alongside wage increases around the world, greatly impacting the expenses of material production and refining.
Gold mining is no exception, and while operational costs have risen, gold’s price has actually decreased slightly over the same time period, further impacting gold mines’ profitability and margins.
| Commodity | Price change since the start of 2021 |
|---|---|
| Coal | +372% |
| Gasoline | +72% |
| Diesel | +53% |
| Electricity | +24% |
| Gold | -13% |
The impact of inflation can’t be understated when it comes to mining operations, which require large amounts of machinery, electricity, and people.
Along with massive haul trucks, bulldozers, and machinery like large-scale grinding units that require diesel and other fuels to operate, refinery operations also consume large amounts of electricity.
How Gold Royalty Companies Avoid Inflation
With no large fleets of vehicles to fuel, refining plants to power, along with significantly smaller headcounts and wage bills, royalty companies barely suffer from rising inflation. Compared to gold mining companies with tens of thousands of employees across the world, gold royalty companies rarely employ more than 50 people.
Along with this, while royalty companies’ revenue comes from royalty and streaming agreements with mining companies, these agreements are structured to ensure royalty companies face none of the operational expenses (and inflation) that miners do.
This is because royalty agreements calculate royalties (which royalty companies receive) as a percentage of the mine’s top-line revenue rather than from the mine’s final profits after expenses, meaning royalty companies get their cut before operational costs and other expenses are deducted.
The Golden Profit Margins of Royalty Companies
With gold’s price having remained stagnant while inflation has pushed expenses up, gold mining company profit margins have been crunched from both sides while royalty companies have avoided the impact.
Over the last four quarters, gold mining giant Newmont Goldcorp’s average profit margin declined to 6.6% when compared to the 22.9% average margins of the four quarters prior. On the other hand, royalty company Franco-Nevada’s profit margins increased from 54.8% to 57.3% over the same time periods.
Without inflation impacting their bottom line, royalty companies have been able to maintain strong financials in a chaotic period for the economy.
In part 2 of this series, we’ll take a closer look at the returns of gold royalty companies, and how exactly they’ve outperformed both gold mining companies and the precious metal itself.
Gold Royalty offers inflation-resistant gold exposure with a portfolio of royalties on top-tier mines across the Americas. Click here to find out more about Gold Royalty.
Source: https://www.visualcapitalist.com/sp/how-gold-royalties-offer-inflation-resistant-gold-exposure/
