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3 Gold Stocks to Buy Even If Gold Doesn't Rise

Sean O'Reilly, The Motley Fool

For thousands of years, gold has functioned as decoration, jewelry...and currency. In fact, it backed the U.S. dollar for decades, until 1971, when President Nixon took the U.S. off the gold standard. Today, gold is still used for decoration and jewelry; it's a hedge against inflation, and an industrial commodity. And despite no longer being used as currency, it is still worth a great deal -- at this writing, $1,242 an ounce.

An umbrella protects a pile of gold coins from the rain.

Image source: Getty Images.

But make no mistake, its value has swung and will continue to swing as time goes on. The only sure way for investors to make money off the precious metal is to invest in gold companies that make a profit no matter what happens to gold prices -- stocks like Royal Gold (NASDAQ: RGLD), Goldcorp (NYSE: GG), and Wheaton Precious Metals (NYSE: SLW).

Here's what you need to know about these three top gold stocks to get started with your own research.

1. Royal Gold

Royal Gold is what is known as a precious metals "streamer." It has royalty claims on gold, silver, copper, lead, and zinc at mines in over 20 countries -- but it doesn't own mines. In exchange for capital, mine owners give Royal Gold working interests in the production of precious minerals. This has led to some pretty hefty profit margins for the company, especially when compared to traditional miners like Barrick Gold and Yamana Gold:

RGLD Gross Profit Margin (TTM) Chart

RGLD Gross Profit Margin (TTM) data by YCharts

Royal Gold has interests in 34 producing properties, 21 development-stage properties, and 131 exploration-stage properties scattered across Canada, the United States, the Dominican Republic, Mexico, Chile, Australia, and Africa.

Investors can expect solid growth from Royal Gold's interests. The company just recently began receiving copper deliveries from its Mount Milligan mine in Canada. Royal Gold's partner in the mine, Centerra Gold, Inc., also upped its production estimates for the mine as part of its third-quarter earnings release. The mine is a prime example of how Royal Gold operates: In exchange for just under $800 million, it has the right to 35% of all the gold and 18.75% of the copper for the life of the mine, at far-below-market rates. Also of note is that this particular mine has an estimated life of 22 years, thanks to over 2.1 billion pounds of copper and 5.8 million ounces of gold in proven and probable reserves.

Mount Milligan is just one example of the power of Royal Gold's business model, and its merits as a top gold stock.

2. Goldcorp

Though it was founded in 1994, Goldcorp didn't hit its stride until the turn of the millennium. Then, in 2000, Goldcorp founder Rob McEwen came up with a unique idea to give his business a boost. He launched the "Goldcorp Challenge," sharing the company's geological data to the public and offering $575,000 in prizes to people who could find the gold. The idea was remarkably successful, with some 110 sites identified; approximately 80% of those mining sites yielded enormous gold discoveries. "The challenge" helped turn the company into what it is today.

As has been pointed out by my colleague Matt DiLallo, Goldcorp has some of the largest and lowest-cost gold reserves in the world. These assets are led by its 40% stake in the Pueblo Viejo mine in the Dominican Republic (one of the largest gold mines on the planet), and its wholly owned Penasquito mine in Mexico. These and other mines make up the company's enormous proved and probable reserve base of 41.8 million ounces of gold.

Such a sizable (and cost-effective) portfolio of mining reserves allowed the company to produce 2.87 million ounces of gold last year, at all-in sustaining costs (a useful metric for mining companies that takes into account current production and reserve replacement expenses) of $856 per ounce. With sizable reserves and competitive cost structures, plans to increase annual production, and its total reserves aggressive through fiscal year 2021, Goldcorp is a must-consider gold stock.

3. Wheaton Precious Metals

Though once called Silver Wheaton, Wheaton Precious Metals is now a bona fide precious-metal streaming powerhouse. It has interests in numerous world-class assets, including silver and gold streams at Hudbay Minerals' Constancia project and Vale S.A.'s Salobo and Sudbury mines. All told, Wheaton Precious Metals has around 20 precious-metal streaming agreements with the most respected mining companies in the world, including Goldcorp, Vale, Glencore, and Barrick Gold.

Recent results have been less enthralling. Gold production for the third quarter fell 15% year over year, but this was expected, because Wheaton ratcheted down its share of the gold produced in a few of its mines.

Looking toward the future, things get a little more shiny. Management reiterated its production guidance for the year in its third-quarter conference call, estimating the company will produce 340,000 ounces of gold and 28 million ounces of silver for fiscal 2017. This figure is expected to hold steady for the next five years -- which is a boon for investors, as it doesn't include the company's share of Barrick Gold's Pascua-Lama project or Hudbay's Rosemont mine. In a recent investor presentation, management noted that should these stakes play out as expected, Wheaton would see an estimated 45% increase in total silver and gold production.

Lastly, with the ship holding steady, management took the opportunity following Q3's results to declare a quarterly dividend of $0.09 per share -- 50% higher than last year. This payout has plenty of room to run as it is set at 30% of the company's average operating cash flow from its previous four quarters.

The Foolish bottom line

The blunt truth is that commodity production can be a tough business. Mining companies and streamers are price takers. Success or failure partially depends upon the whims of supply and demand. However, by focusing on gold stocks that have an edge, Foolish investors can have the last laugh when it comes to gold stocks. Royal Gold, Goldcorp, and Wheaton Precious Metals all have unique attributes that make them long-term winners, no matter what gold prices do.

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Sean O'Reilly has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.