Editors Note:

It's amazing how one day and few bits of good news can cause a shift in the wind.

Well, it looks like the bounce we've all been waiting for has started. Friday's market action started off strong, moved higher from support, moved higher all day and closed at the high of the day. Why? Because we got some good news.

Starting off, GDP in the Eurozone came in better than expected. This, along with a confirmation that DeutcheBank would indeed be buying back up to $5.4 billion worth of its bonds helped to send EU banks and the entire EU market place up by 2.5% with many of the EU banks seeing double digit gains to wipe out the previous days losses.

Oil prices also played a part. The rumor which hit the market on Thursday, that the UAE and OPEC were ready to cut production, turned out to be another in a long line of iffy statements to that affect but did not phase buyers. Oil prices surged more than 11%.

Data in the US also played a role. Retail sales were better than expected and, along with revisions, show mounting improvement in the sector.

Whether or not the market is at a bottom, or that oil has bottomed, is still yet to be seen but like it or not the overall picture is beginning to brighten.


Royal Gold - RGLDCompany Description

Gold just had its best week in over four years. As of the Friday settlement prices have risen nearly 15% from their lows set during the last fiscal quarter. In the first 6 weeks of this year alone spot prices have averaged near $1150, higher than the $1105 average price for the 4th quarter of 2015. Looking back at the entire past year, Friday's close is the highest price paid for gold since the first two weeks of 2015. All reasons to expect improved earnings among the gold miners. Now, factor in the low low price of fuel and the possibilities for earnings improvements only gets better.

Royal Gold, Inc. is engaged in the acquisition and management of precious metals royalties. They also seek to acquire existing royalties and to finance projects that are in or near production in exchange for royalty interests. Through subsidiaries they also explore and develop properties thought to contain precious metals in order to sell them to existing mining operations in return for royalty payments.

Why We Like Them

Even without the massive surge in gold prices Royal Gold is delivering results. The company has spent the past few quarters prior to the most recently reported ( Fiscal Q2 reported on 2/3/2016) investing heavily in new and current projects. This investment has begun to pay off in spades and is going to be supercharged by higher realized sales prices for the underlying commodity.

On an EPS basis RGLD missed by a penny, primarily due to the low prices of gold realized in the 4th quarter (the low for gold in the period was $1045 with an average reported sales price of $1094). Despite the low prices in gold revenues were much better than expected, 15% better, driven on increased production. Fourth quarter EPS also reversed a loss experienced in the comparable quarter of the previous year. Revenue was a company record, up 60% year over year. On a cash flow basis available free cash improved by 75% and all on the back of a 74% increase in gold volumes.

The end result is a company with a much stronger balance sheet, strong production and a positive forward impact related to higher gold prices. Looking at the current report one of the things that stands out to me is the 27,500 ounces of gold being held in reserve. Based on the 4th quarter average realized price this is worth about $30.085 million dollars. Factoring in the Friday price brings this total up to near $34 million, a 10% increase in value simply due to the price of gold.

From the RGLD earnings report;

"Increased production from Mount Milligan and contributions from our recently acquired streams at Pueblo Viejo, Andacollo, Wassa and Prestea drove our record performance in the second quarter as expected," says Tony Jensen, President and CEO. "Impressive volume growth at these properties and stability within the rest of the portfolio are yielding solid financial results and generating strong free cash flow."

Looking forward there are a couple of things I think we can expect from this sector and company. For one, upgrades in the sector. Ever gold miner will benefit from higher prices, all will increase cash flow and all will be better positioned for future gains. Another is upgrades specifically for this company driven by the strong performance delivered in the last quarter. Additionally, stronger cash flow and improved balance sheet could lead easily lead to stock buy backs, special dividends and increased dividends in upcoming quarters.

Because this play is based on rising gold prices as much as it is on the performance of the company we need to be ready for some volatility. That being said, unless gold prices fall back below $1100 per ounce this company stands to do very well in terms of cash flow and cash available to share holders.

Central bank activity is the real risk here. If the FOMC continues to raise rates and strengthen the dollar gold could fall back to $1100 or lower. The mitigating factor is that EU GDP came in much stronger than expected last week and is not supportive of additional QE from the ECB. Without ECB QE, and with diminished expectations for aggressive FOMC rate hiking policy between the two banks is no longer diverging as it was in the 4th quarter of last year and should help keep dollar values low, if not moving lower.

Our play, buy the April $42.50 call with a trigger price of $43.50.


No New Bearish Plays