It has been written all over gold mining sites and goldtent to that investing in royalty companies is the way to make money in mining. I agree this is true on a long term basis. Early in a bull market however, when senior miners and mid cap producers are still highly indebted, there is a lot of money to be made when gold rallies strongly as this enables all these companies to pay off debt, generate lots of free cash flow and invest for growth again.

I therefore believe one’s should pay attention to this and include some big and mid cap producers in its portfolio, besides some royalty plays too.

The best way to look at this is to look at possible target prices for GDX (an ETF including royalty plays) and the HUI or Xau, both an index of senior miners.

https://www.kitco.com/stocks/hui.html

Looking at possible performance into the future:

If gold at $1550, senior miners like GOLD still can rally 20-30% with gold price of $1550, meanwhile royalty plays like FNV and RGLD are fully valued already. This does not mean these names will not increase in value, but the money to be made is in senior producers.

With gold price of $1550 the targets for GDX should be near 32 level and for the HUI at 280. This shows a far different profit potential of 10% for GDX and 27% for HUI.

If we look at  long term potential, of $1700-$1800 gold, the same applies, Cash flow at the royalty companies will only increase in line with gold price increase (20% from current gold price). Most gold producers, however will have upside potential of 80%+ or even more thanks to balance sheet deleveraging and cash flow expansion of 50-100%+

I therefore strongly believe good quality producers with some debt on balance sheet should be part of a mining portfolio as in the next run to $1700-$1800 gold these companies will be the out-performers!

If GDX reaches 40 level, HUI should be at 400 level, if GDX at 50, HUI should be at 500 level

This means, on a 1-2 year horizon , that a portfolio diversified miners including royalty plays could yield 38%- 73% based on GDX performance. A portfolio of miners only like HUI or XAU index could yield 80% -130%.

I believe that with gold at $1700-$1800 a 100% return should be possible if you choose the right miner with a nice mix of quality ounces and management/debt/ growth and good looking chart!