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Royal Gold Is Set to Outperform

- By Alberto Abaterusso

Kitco.com reported on Tuesday that Bloomberg Intelligence projects gold bullion will trade up to $1,400 per troy ounce on the London market.

The prediction, which reflects an 8.5% upside from the closing price of $1,290.3 per troy ounce on Tuesday, suggests being bullish on the precious metal and its publicly traded producers.

According to Wall Street analysts' overweight recommendation rating, Denver-based precious metal royalty and streaming company Royal Gold Inc. (RGLD) (TSX:RGL) will outperform the industry within 52 weeks.

The average target price of $95.86 per share reflects a nearly 5% upside from the closing price of $91.5 at on Tuesday. As such, I would suggest waiting for a significant weakness in the stock before adding shares of Royal Gold to any position.

According to the chart below, the stock is not cheap. It is trading well above the 200, 100 and 50-day simple moving average lines. Shares are currently 30.4% off the 52-week low of $70.16 per share and only 7.7% from the 52-week high of $98.53.

Further, the price-book ratio of 2.83 is above the industry median of 1.62 and the price-sales ratio of 13.92 tops the industry median of 1.41.

Royal Gold has already outperformed the VanEck Vectors Gold Miners (GDX) exchange-traded fund by 2% so far this year. It has a market capitalization of nearly $6 billion.

If analysts' estimates are correct, I would recommend buying shares after the price has retreated to year-end 2018 levels for 30% stock appreciation.

If gold prices hit $1,400, Royal Gold will benefit from an increased gold margin as each rise in the price of the commodity will, given the absence of mining costs, drop to the bottom line.

The price of the commodity is the main catalyst to the share price of Royal Gold, which has profitable operations and a solid balance sheet.

GuruFocus rated Royal Gold's profitability and growth a high 8 out of 10, driven by fruitful precious metal streams and royalty interests the company manages on more than 190 mineral properties. The portfolio includes 41 operating mines and the development of 17 metallic projects.

Most of these assets are located in friendly mining jurisdictions, which enhances my preference for this operator.

The company's's portfolio is very diverse from a commodity standpoint as well. Royal Gold generates income from the management of mineral interests owned in silver, copper, nickel, zinc, lead, cobalt and molybdenum deposits.Gold remains the main income source as the company generated 77% of its $456.8 million in revenue from the metal in 2018.

Royal Gold closed the second quarter of fiscal 2019, which ended on Dec. 31, reporting a 14.6% decrease in revenue to $97.6 million and a 22.2% decrease in operating cash flow to $58.8 million. The company blamed the declines on lower gold, silver and copper prices and on an 11.3% drop in the production of gold equivalent to 79,600 ounces.

The company's balance sheet is solid as GuruFocus assigned a high financial strength rating of 7 out of 10. As a result, when commodity prices are low and most of the industry's players are seeking financing options, Royal Gold has ample financial means to upgrade its portfolio through investments.

In addition, on April 19, Royal Gold will pay a quarterly dividend of 26.5 cents per ordinary share to shareholders of record as of April 5. The ex-dividend date is April 4. Based on the closing price on Tuesday, the distribution leads to a forward dividend yield of 1.17% versus an industry median of 3.14%.

The company has paid dividends since 2000.

Disclosure: I have no positions in any securities mentioned.

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This article first appeared on GuruFocus.