Metal Royalty and Streams
Companies that fund mines for exchange of revenue or precious metal
What are Metal Royalties and Streams?
Metal royalty and streaming companies fund mines in exchange for money or precious metal. Mines often have trouble getting funding through traditional routes, such as banks, because of the high costs and unpredictable revenue associated with the mining industry. This is why they borrow funds from royalty and streaming companies. This is also beneficial for royalty and streaming companies, as they get exposure to precious metals profits without having to take on all the risk of actually operating a mine.
Summary
- Metal royalty and streaming companies provide funds for mines in exchange for future payoffs.
- Royalty companies receive a fixed percentage of the revenue generated by a mine, while streaming companies receive physical metals.
- The benefit for these companies is larger profit margins, less exposure to risks, and diversification while still being in the mining industry.
Overview of a Metal Royalty Company
A metal royalty company will give a mining company a loan and then receive a percentage of the revenue generated by the mine. Generally, the royalty is small, around 1% to 3 %. For example, Franco Nevada can give Kirkland Gold $400 million in loans and, in exchange, they get 3% of the royalties on a mine. If Kirkland Gold’s mine produces 200,000 ounces of gold, then Franco Nevada will get 3% of the revenue generated from the 200,000 ounces. Assuming the spot price of gold is $1,200, that means the mine made $240,000,000 million. A 3% royalty would net Franco Nevada $7,200,000.
Overview of Streaming Companies
A streaming company also provides funding to a mining company to get a percentage of interest in a particular mine. For example, the streaming company, Franco Nevada, might give a $600 million loan to the mining company, Newmont Goldcorp. Newmont Goldcorp will use the loan to develop Mine A. In exchange, Franco Nevada will have a 7% interest in Mine A until 200,000 ounces of gold has been delivered by Newmont, and then receive 2% after.
When the deal is created, streaming companies also specify a price relative to the spot price to purchase the gold that the mining company produces. For example, if the deal was for 50% of the spot price, then Franco Nevada can realize quite a nice profit margin by paying Newmont Godcorp $600 per ounce for gold when the spot price is $1,200 per ounce. If its agreement with Newmont enables it to purchase 14,000 ounces per year, Franco Nevada stands to net $8.4 million in profit.
Benefits of Investing in Royalties and Streams
A royalty and streaming company has several advantages, such as diversification, wide margins, and lower risk. Since these companies invest in many mines at once, if one fails, they may still receive revenue from other mines. They can also diversify the risk by investing in mines in different stages. Instead of only investing in mines in the production stage, these companies also buy stakes in mines that are still being developed. By having multiple, some a much as 200, mines in various stages of development, royalty and streaming companies are less impacted if a few of the mines are not able to generate revenue.
A streaming company gets to buy the metal at reduced prices, which guarantees a wide profit margin. The reduced price is significant enough that the margin will stay very profitable even if the spot price falls. If Franco Nevada is buying gold at $600 an ounce, then even if the spot price of gold declines from $1,200 an ounce to $900 an ounce, Franco Nevada is still turning a nice profit on its gold investments.
Risks of Investing in Royalties and Streams
Even with the benefits of higher margins and consistent earnings, there are still risks with investing in royalties and streams. One of the main risks relates to the structure of the business. To invest in mines, royalties and streaming companies need a large amount of capital. The two most common ways of raising capital are through stocks or debt. Companies that want a debt-free balance sheet will raise the money through stock issues. This leads to dilution of ownership stake for existing shareholders. If the investment leads to a successful mine, the investors will be rewarded with higher earnings.
A company can also get funding through debt and they will be responsible for the principal and interest payments. If the mine is profitable, then the cash flow will cover the debt payments. If not, then the company will incur the loss of having to fund the debt repayment on their own.
Spot prices and mine production obviously impact the profitability of royalty and streaming companies. If the spot prices fall, royalty companies will receive less revenue and streaming companies can only sell their metals at a lower price. In the case of mine delays, both types of companies will be impacted by a delay of gold flow.
Additional Resources
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