Royalties and streams explained
What is a royalty?
A form of financing. In its simplest form the royalty company provides the mine operator with an upfront payment and in return receives a percentage of revenue generated from production at the mine. A stream is similar but instead of percentage of revenue, the royalty company has the right to buy a percentage of production at an agreed, discounted price.
What is a metal stream?
A metal stream is an agreement that provides, in exchange for an upfront payment, the right to purchase all or a portion of one or more metals produced from a mine, at a price determined for the life of the stream.
Streams, whilst providing similar outcomes for Ecora Royalties, are not royalties because they do not constitute an interest in land and there is an ongoing cash payment required to purchase the physical metal. However, a stream holder is not ordinarily required to contribute towards operating or capital costs, nor environmental or reclamation liabilities.
Types of royalties
The Group’s royalties are mostly revenue or production-based royalties. Typically, these royalties are either gross revenue or net smelter return royalties, each of which can be described as follows:
A ‘GRR’ entitles the royalty holder to a fixed portion of the gross revenues generated from the sales of mineral production from a property. In calculating a GRR payment, deductions, if any, applied by the property owner to reduce the royalty payment are usually minimal, and GRRs are therefore the simplest form of royalty to account for and implement.
‘NSR’ royalties entitle the holder to a fixed portion of the net revenues received from a smelter or refinery from the sales of mineral production from a property, after the deduction of certain off-site realisation costs. Typical realisation costs include those related to transportation, insurance, smelting and refining. These deductions are generally higher in base metals mines due to the semi-finished product, such as concentrate, often being produced at the mine site, when compared to precious metals mines, which produce a nearly finished product on site.
Primary royalties are entered into between a royalty company and the property owner directly, where the property owner grants a royalty to the royalty company in return for one or more upfront cash payments from the royalty company. In contrast, secondary royalties are existing royalties that are acquired from a third party with no payment made to the owner of the underlying property.
Benefits of royalty investments
to the royalty company:
1. Inflation protection
Royalty payments are calculated based on revenue without direct exposure to development, operating and capital costs of the operation.
2. Diversification
Portfolio diversification, across commodities, operations and projects, and jurisdictions lowers earnings volatility.
3. Upside potential
Royalty company benefits from production upside (life of mine extensions/exploration activities) and commodity price out-performance.
Benefits of royalty investments
to the mine operator:
1. Typically non-dilutive
Often value accretive to equity holders relative to issuing new equity capital.
2. Asset specific
A royalty attaches to an asset, and is not on the balance sheet.
3. No fixed payment
Compared to debt, royalties typically have no fixed payments or maturity date
4. Keep full autonomy
The miner retains full control over operating decisions.