Royalties and Streams
Mining royalties and streams represent a highly attractive asset class
Mining royalties and streams have a number of inherent advantages when compared to direct equity investment:
- High yielding investments ranking senior in the capital structure and often secured
- Typically not exposed to capital or operating costs of underlying assets
- Exploration and capital investment add value as assets are advanced towards production, mine lives are extended or production rates increased, at no cost or dilution to the holder
- Direct exposure to commodity prices
- Royalty and streaming companies trade at attractive valuation multiples
- Scale / diversity inherently enhances value
- Ability to increase returns through low cost leverage
Under a royalty agreement, the holder of a royalty is entitled to receive a payment based on a fixed, sliding-scale or adjusting percentage of minerals, metals or other products produced at a mine or revenues, net proceeds, profits or other financial criteria or reference calculation. No ongoing payment to the owner of the mine is contemplated in a typical royalty agreement. Most royalties are uncapped as to time or quantum of payment, but they may contain buy-back options.
Royalties can be created in return for the provision of finance to the owner of a mineral property or mining operation, but can also be generated in other ways, including as consideration in a corporate transaction or for the sale of a mineral property or mining operation, as a backstop to a dilution clause in a joint venture arrangement or as an adjunct to a debt or equity financing arrangement
The royalty can take several forms; the most common are described below.
- Gross Proceeds Royalty (GPR)
- Gross Smelter Return (GSR) Royalty
- Gross Value (GV)
- Milling Royalty (MR)
- Net Profits Interest (NPI) Royalty
- Net Smelter Return (NSR) Royalty
- Net Value Royalty (NVR)
Royalties may be:
- configured to cover particular commodities, providing mine operators the flexibility to raise finance on a commodity as well as project level
- limited to certain areas of the mine, allowing the exploration upside to be shared by the operator and the royalty holder
- set to follow production hurdles, ensuring that the operator only has to pay the royalty once an amount of production has been achieved
Stream agreements can be distinguished from royalty agreements insofar as the owner of the stream agrees to make ongoing payments during the life of the stream, on a per unit basis, for the mineral products or contained metal delivered (or credited) from a particular mine.
The ongoing per unit price is usually fixed at a substantial discount to the mineral or metal prices prevailing at the time the stream agreement is entered into. The right to receive the stream is usually paid for by way of an upfront payment (though this is sometimes structured as a loan).
Streams often, though not always, concern the right to a specific by-product of mining operations (e.g. the right to gold in a primary base metals mine).