Royalties & Streams
Mining royalties and streams represent a highly attractive asset class
Mining royalties and streams represent a highly attractive asset class
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, but they can also be generated in other ways, including as consideration in a corporate transaction or for the sale of a mineral property, as a residual interest arising from dilution of a joint venture interest or as a ‘sweetener’ or adjunct to a debt or equity financing.
It is essential to understand the limitations of a royalty or stream in assessing its value
Stream agreements typically involve an upfront payment for the delivery of a ‘stream’ of processed products, as and when produced, which are purchased at a substantial discount to the prevailing market price or at a set ‘low’ price. Streams often involve by-products (e.g. the right to gold in a primary base metals mine). The following would be typical stream transactions:
• a US$50,000,000 purchase of a stream of 50% of all silver ounces to be produced from a (predominantly) gold mine at a price per ounce of USD10 per ounce (when the prevailing silver price is perhaps USD$20 / ounce), capped at 15,000,000 ounces; or
• a US$10,000,000 purchase of all rhodium produced at a PGM (platinum group metals) mine, for life of mine, at a 50% discount to the prevailing price of rhodium at the time of credit.
Streams can be distinguished from royalty agreements insofar as the owner of the stream typically has the right to take delivery of product (or receive credit therefor in a metal account) and agrees to make ongoing (discounted) payments for such deliveries during the life of the stream. Sometimes the upfront payment is characterized as an advance payment for goods; sometimes it is characterized as a loan to be repaid by product deliveries.