A specific type of business can generate big returns — for life. How to put its power to work in your portfolio
Here at InvestorPlace, we’re proud to feature some of the investment industry’s brightest, most successful analysts.
As just two examples, during the first half of 2019, Matt McCall gave his subscribers the chance to bank 622% returns through his legalized marijuana pick, Akerna.
Meanwhile, Neil George’s 10 highest-yielding stocks, bonds, and funds ended the first half of 2019 paying out an average yield of 8.5%.
In short, our analysts excel at finding high-performing investments.
Given this, when two of them independently zero in on a particular type of business model, applauding its ability to generate cash, we take notice. And that’s what’s just happened with Matt and Neil.
What’s so great about this model?
In short, it prints money.
You see, given its structure, it doesn’t require huge amounts of expensive machinery that erode revenues. It doesn’t need a vast labor force that comes at a high salary cost. And it needs zero dollars for marketing to consumers.
It simply invests then enjoys a stream of returns … most times, in perpetuity.
In today’s Digest, let’s dig into what’s happening here. You see, this model applies to more than one industry. So, independent of the specific companies Matt and Neil like, it’s valuable to be aware of it so you can look for it in the investment sectors you prefer.
Let’s jump in.
***How a losing mining company discovered a winning mining strategy
Regular Digest readers know Matt McCall as our resident marijuana expert. Recently, he wrote to subscribers, introducing them to the power of this business model.
To help illustrate, Matt referenced a specific company from a different industry than marijuana — Royal Gold (RGLD).
I’ll let him take it from here:
If you’re not familiar with Royal Gold, it was founded in the early 1980s by Stanley Dempsey … a man who never discovered a single ounce of gold — but still got very wealthy from gold mining.
Dempsey was a geologist, so gold mining was a natural fit. Yet after a few long months, his new company had burned through lots of money, and hit nothing but dirt …
Rather than spend the remaining cash on further exploration, Dempsey invested it with more knowledgeable, experienced gold miners. These seasoned pros would do the exploring. And Royal Gold would receive a cut of the proceeds.
Matt then goes on to explain that Royal Gold’s first $1 million deal was for a project in northeastern Nevada. In return, the miner owed them 20% of the proceeds. But here’s the kicker …
That 20% obligation would be for the entire life of the mine.
So, how’d it turn out?
In the first year after inking the deal, Royal Gold received $9 million. The second year brought an additional $8 million. The third, $12 million.
Here’s Matt for the takeaway:
All in all, more than $170 million has come in. That’s a 16,900%return on Dempsey’s original $1 million.
***The power of the royalty model
Whether it’s gold, silver, or oil, many fledgling producers often find themselves in operational trouble.
Commodity development can come at a high cost. There are significant overhead and fixed expenses that put these companies under financial pressure.
It’s not uncommon for, say, a gold mining company to be at the 5-yard line of completing a new mine, only to run out of cash and be unable to finish it.
So, what happens in that situation?
Well, the company could just accept its fate and fold. But that wouldn’t make any sense. The mine is so close to completion and the potential for a significant gold strike. Plus, folding would mean throwing away all the time, effort, and money that went into developing the mine up to that point.
Another option would be finding an investment partner — in this case, a gold royalty company such as Royal Gold.
Royal Gold would give the bankrupt mining company enough cash to continue operations and finish the mine. In exchange, Royal Gold would negotiate for itself a cut of all future proceeds from the mine. And most of the time, the royalty stream would exist for as long as the mine is productive.
If this sounds like a lopsided deal for Royal Gold, it is! But that’s the beauty of the royalty model.
The mines need Royal Gold’s cash far more than Royal Gold needs the mine. That gives Royal Gold leverage, and the ability to be picky when it comes to choosing its partners.
The most successful royalty companies have teams of analysts finding the best investments that are most likely to produce winners. Not only that, but great royalty businesses often spread their capital over a broad portfolio of investments, thereby reducing risk. It’s an amazing model.
Back to Matt’s update:
(Royal Gold) is still collecting on that investment — and many more …
Franco Nevada (FNV) is a similar business in gold royalties. Early investors could have turned $1,000 into $453,000.
***This brings us to Neil George, since it turns out that Franco-Nevada is the exact company that Neil recently added to his Profitable Investing portfolio
Neil is master income investor, so he’s very familiar with the royalty model. After all, it’s basically a perpetuity — what’s not to like for an income investor?
Here’s Neil on Franco-Nevada and the royalty model:
Franco-Nevada Corporation (FNV) … isn’t a mining company — having long ago figured out that mining wasn’t the most profitable and predictable way to cash in on gold.
Instead, the company acquires and holds royalty interests from gold producers and owns proceeds from gold mining companies. This means that it doesn’t have to buy and run mines or deal with the related expenses that bring a whole lot of costs and uncertainty to other gold businesses.
Neil goes on to explain how FNV just collects cash from gold production as it streams into the market. If gold goes higher in price, the company makes more revenue.
To learn more from Neil about Franco-Nevada and his other income investments, click here.
***You might be reading this and wondering “but how does this apply to marijuana?”
There are actually many parallels between the fledgling marijuana industry and gold miners trying to strike it big.
The marijuana sector today is still disorganized as countless tiny companies are trying to gain traction and market share. Some of these companies will go on to be tomorrow’s market leaders, others will be purchased by larger companies, but a great many will go nowhere and have to close their doors.
In part, what will determine the fate of any particular marijuana company is how long it has cash — the lifeblood of any business — enabling it to survive and grow into tomorrow’s winner. That’s where the royalty model kicks in. You see, Matt has found a Royal-Gold-like company in the marijuana space.
Back to Matt:
By contracting with early stage marijuana companies — which often find it difficult to secure funding — this company is building a diverse (and extremely lucrative) revenue stream.
Its revenues are expected to explode: From less than 250,000 Canadian dollars in 2016, it’s expecting nearly CA$1 billion by 2020.
The time to get in is now: This potentially major player trades at less than 1/40th the value of Canopy Growth. And as more of its deals bear fruit — or leaves, in this instance — the company is already positioned for big upside.
While I’m able to reveal Franco-Nevada as Neil’s pick, I’m unable to do so for Matt out of respect for his subscribers. If you’d like to discover what it is and get access to all of Matt’s marijuana research and portfolio picks, click here.
In any case, I hope you’ll begin looking for quality royalty companies with your investments. Beyond gold, silver, and marijuana, you can find royalty businesses in obvious industries like oil and natural gas, but there are less obvious ones too. A few examples:
Tech — think IBM paying Microsoft a royalty in exchange for being allowed to use Windows operating system …
Music — royalties are paid to the individuals or groups holding the copyrights to the songs …
Book publishing — beyond an advance, authors receive additional royalty payments on sales that accrue beyond a certain “pay back” figure …
Fashion — a designer like Ralph Lauren licenses its name on a clothing line in exchange for future royalty payments …
Keep your eyes open and you’ll begin seeing more of them. A life-time stream of income from a one-time investment. Not a bad business model.
Have a good evening,