Mining companies can have high overhead with enormous infrastructure and operating costs, and also have to deal with swings in the commodity cycle.
A new precious-metals mining exchange-traded fund seeks to mitigate some of the traditional risks associated with mining investing with a smart beta approach. The U.S. Global GO GOLD and Precious Metal Miners ETF (GOAU), which debuted Thursday, focuses on mining royalty companies as its top holdings. It takes a rules-based approach that also chooses traditional miners with well-run, low-cost active mines and strong balance sheets, while rejecting those that rely primarily on debt financing. San Antonio-based U.S. Global Investors, which created the ETF, is known for its active management in precious metals.
Royalty companies provide upfront capital to miners to fund the producers’ exploration and production projects. Many royalty companies are staffed with people intimately familiar with the mining business—such as geologists and metallurgists—who can offer expertise, and the companies often give miners better terms than traditional lenders. The lender receives royalties on whatever precious metals are mined at a fixed, lower-than-market-price rate, known as a “stream.”
That gives royalty companies access to production from different mines in different parts of the world, but without the overhead costs.
GOAU is based on the U.S. Global GO GOLD and Precious Metal Miners Index. It has 28 names and was seeded with $2.4 million. It has an expense ratio of 0.60 percent and rebalances quarterly. The fund’s top three holdings will always be North American royalty companies and their weights are capped at 10 percent.
GOAU’s top holdings are Royal Gold Inc., Wheaton Precious Metals Corp. and Franco Nevada Corp.
To round out the index, the next five highest-scoring companies will receive a weight of 4 percent. Preference is given to North American miners, but the fund will also include miners with a U.S.-listed ADR that are domiciled in Australia, South Africa or the U.K., and have a minimum market cap of $400 million. Similar rules are made on the next 20 companies, which must have a minimum market cap of $200 million. The top half of those 20 companies will be weighted at 3 percent, and the bottom half will be at 2 percent.
Frank Holmes, chief executive officer at U.S. Global Investors, says the fund uses quality and momentum factors when considering companies. Due to their low overhead, royalty companies can have very high revenue per employee.
For instance, the revenue per employee at Franco Nevada is $21 million, according to data from Marketwatch. By comparison, that number at Goldman Sachs is $1 million.
“What assets does Franco Nevada have royalties on? They have royalties on Newmont and Barrick,” Holmes says, citing two of the biggest mining companies. “What’s Barrick’s revenue per employee? $308,000. What’s Newmont’s? $300,000. So it’s of a magnitude that’s massively different.”