Royalty Financing And Investing In Rapidly Emerging Commodities Outside Of Gold And Silver
In recent years, royalty and streaming companies have quickly emerged as a popular choice among a broad spectrum of investors. They provide the capital to finance many of the most highly prospective mining projects around the world to provide investors with a perfect storm of minimized risks and economic upside.
With unparalleled exploration, diversification, and project acquisition opportunities, this particular type of alternative financing could be set for significant expansion over the next decade.
What is royalty streaming?
Marin Katusa, chairman of Katusa Research, told Kitco News in an interview, “I would start at the royalty side of things … that’s the easiest place to start because these are teams that are de-risking themselves.”
Royalty agreements and streams have similar structures at face value but key differences set them apart.
Royalty agreements: Also known as net smelter returns, these agreements provide royalty holders with a percentage of a specific mine’s revenue generated from production, typically hovering around one to three percent. Another common type of royalty agreement includes net profits interests, where the royalty holder receives a percentage of the profits rather than the revenue.
Streams: These contractual agreements provide the right to purchase a certain percent of metal production directly from the mine, typically ranging from five to twenty percent. Streams often will have a predetermined purchasing price for the metal, which is usually either a fixed dollar amount or a fixed percentage of the spot price.
An important distinction between royalty and streaming companies is that these entities are not mine operators. Instead, they seek to find untapped value through financing and working with miners to curate agreements that provide their shareholders with steady exposure to various mineral and metal markets. These agreements enable recipient mining companies to further develop or expand projects, providing greater returns for vested interests and the companies with royalties and stream agreements on the projects.
For junior mining companies, having the financing and support from more established royalty and streaming players can be especially beneficial as it may significantly boost development and exploration efforts and improve balance sheets across highly prospective project portfolios.
Risks and rewards to royalty streaming
In the case of royalty streaming, outlining major pros and cons can paint a clearer picture as to what potential downfalls these agreements have and what makes them one of the most popular financial strategies in 2021.
One of the main downfalls of royalty streaming relates to the structure of the business. Royalties and streaming companies have traditionally had intense competition competing within the precious metals space and needed a large amount of capital to invest in mines, which are raised through stocks or debt. Either companies accumulated debt on their balance sheet or issue stocks, which can involve some unfavorable stock dilution. However, there are very few royalty groups focused on clean energy metals and the costs of deals has been much lower thus far.
Another risk involves actual spot prices and mine production. If spot prices fall, so can revenue generation for royalty companies and metal selling prices for streaming. Additionally, in the case of mine delays, both types of companies may be impacted by a delay of commodity flow. Luckily, there are no costs to holding a royalty so there are no operating costs associated with shutdowns and the G&A required for running royalty companies is very low. .
By avoiding many of the operational costs, royalty and streaming companies cut out significant risks commonly associated with mining investments. While mining companies’ operational costs may rise, royalty and stream holders simply reap the potential benefits of high margins during peak pricing periods for their metals, having acquired them at lower fixed prices according to their agreement.
Another key advantage royalty and streaming companies have is advantageous portfolio diversification and the ability to be selective with their agreements. With the right management and strategic acquisition team, companies can minimize concentrated jurisdictional or asset risk and make agreements with mines already at near-term production staging. Since costs per ounce are contractually defined, this also protects streamers from cost overruns across the life of a mine.
Electric Royalties (TSXV:ELEC) is a royalty company focused on building a premium portfolio that takes advantage of the demand for a wide range of commodities and critical metals like lithium, vanadium, manganese, tin, graphite, cobalt, nickel and copper. Its focus on vital battery and base metal elements leverages the growing demand and global drive toward electrification across virtually all sectors, including transportation, rechargeable batteries, large-scale energy storage, renewable energy generation and more.
The company has a robust commodity portfolio, which helps to diversify investment and mitigate risk for investors and shareholders while leveraging exploration upside, revenue-driven business modelling and more. It currently has a portfolio of 12 royalties with exceptional exploration potential and four additional royalties currently under acquisition.
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