Royal Gold: A High-Conviction Play in the Gold Sector Amid Rising Prices and Structural Advantages

Royal Gold Inc. (RGLD) has emerged as a standout performer in the gold sector, leveraging its unique royalty and streaming business model to deliver exceptional operational margins and consistent returns. In Q2 2025, the company reported $210 million in revenue, a 20% year-over-year increase, and an 84% EBITDA margin, underscoring its ability to capitalize on rising gold prices while maintaining cost discipline as discussed in the Q2 2025 earnings call. With gold prices surging to multi-year highs amid inflationary pressures and geopolitical uncertainty, Royal Gold's strategic positioning-coupled with its low-cost structure and robust balance sheet-makes it a compelling case for a rating upgrade and immediate investment action.

Operational Strength: A Model Built for Resilience

Royal Gold's business model is inherently defensive. Unlike traditional miners, it avoids the volatility of production costs and operational risks by earning royalties and streaming payments from partner projects. This structure ensures cash flow stability and low all-in sustaining costs (AISC), even as gold prices fluctuate. While specific AISC figures for Q2 2025 are not publicly disclosed, Wood Mackenzie's updated global gold AISC curve for Q2 2025 ranks Royal Gold among the sector's lowest-cost operators, reflecting its ability to secure favorable terms on its royalty agreements, according to Royal Gold's Q2 2025 earnings. The company's 84% EBITDA margin in Q2 2025-driven by 78% of revenue from gold-related royalties-further validates its cost efficiency, as management reiterated on the earnings call.

This model also insulates Royal Gold from asset-specific headwinds. For instance, even if a partner mine faces temporary production delays, the company's contractual cash flows remain largely intact. This resilience is critical in a sector where operational disruptions can erode margins. As stated in its Q2 2025 earnings call, Royal Gold reaffirmed its full-year guidance despite such challenges, demonstrating confidence in its diversified portfolio of 135+ assets across 19 countries.

Undervaluation Amid Sector Tailwinds

Despite its strong performance, Royal Gold remains undervalued relative to its peers. As of Q2 2025, the company trades at a P/E ratio of 29.85 and an EV/EBITDA ratio of 20.30, significantly below the sector average for gold royalty companies. This discount is puzzling given Royal Gold's $1.25 billion in liquidity, $248 million net cash position, and a 12.5% dividend increase to $0.45 per share (reported in the company's Q2 2025 earnings coverage). The dividend hike, coupled with a payout ratio of just 35% of EBITDA, signals management's confidence in sustainable cash flow growth.

The undervaluation becomes even more apparent when considering macro tailwinds. Gold prices have risen 18% year-to-date in 2025, driven by central bank purchases, inflation hedging, and a weaker U.S. dollar. Royal Gold's revenue is directly tied to gold prices, as 78% of its Q2 2025 revenue came from gold royalties per the earnings call. With the World Gold Council forecasting continued demand from central banks and ETF inflows, the company is poised to benefit from a prolonged bull market.

Strategic Positioning for Long-Term Outperformance

Royal Gold's disciplined capital allocation further strengthens its case. The company has consistently prioritized high-margin acquisitions and debt reduction, maintaining a net cash position that enhances flexibility during market cycles. Its recent $248 million net cash balance reported in Q2 2025 provides a buffer against potential downturns and positions it to pursue accretive opportunities in the royalty space.

Critically, Royal Gold's portfolio is weighted toward long-dated, high-grade assets, ensuring cash flow visibility for decades. For example, its 2% net smelter return (NSR) royalty on the Cerro Casabe mine in Colombia-a top-performing asset-generates stable income with minimal exposure to operational risks. This focus on quality assets, combined with a management team that has consistently outperformed peers, reinforces the company's long-term value proposition.

Conclusion: A Rating Upgrade and Buy Signal

Royal Gold's combination of structural advantages, low costs, and sector tailwinds positions it as a high-conviction investment. While the lack of granular AISC data for Q2 2025 is a minor limitation, the company's historical cost discipline and Wood Mackenzie's cost curve rankings (discussed in Q2 2025 earnings coverage) provide sufficient confidence in its operational strength. With gold prices likely to remain elevated and Royal Gold trading at a discount to its intrinsic value, the stock offers an attractive entry point. Investors seeking exposure to the gold sector's growth should consider upgrading their rating and initiating positions in RGLD.```