I THINK MINING

In the final session of today’s webcast on Mining Investment Understanding the Risks, we spent time on the nature, structure, and benefits of investing in Mining Royalty companies.  Michael Collins shared what he described as seven years of learning with us on the topic.

There is some information out there on such companies, but not a lot.  Here is one link that is informative, but not necessarily detailed enough for the beginner.  The article notes:

Gold royalty companies provide upfront capital to developing gold mining producers to help with the expenditures of bringing the mine into production. In exchange for providing this upfront capital they receive a royalty on future production.

At this link is a good article on the topic.

At the other end of the scale, at this link are 320 pages on mining royalties and taxation.  More than I care to read.  But be careful:  countries impose royalty payments on mines–a form of tax.  But the royalty owed by a mining company to a Mining Royalty Company is not a tax—it is an entirely different beast, burden, or benefit depending on how it is structured.

Let me try to explain it simply.  You are a junior mining company.  You have a very promising ore body and know you can make it into a profitable mine.  You have enough money from sale of shares to finance fifty percent of the project to bring the mine to production.  Your friendly bankers are willing to lend you another thirty percent of the money needed to go to production.  Where do you get the next twenty percent?  Neither the banks, nor grandma, nor the stock exchange is able or willing to come up with the money.

This is when you go to a Mining Royalty Company.  There are, incidentally very few of them, so you do not have to do much phoning around or travel.  You ask and they will give you the twenty percent you need to proceed.  This is cash up-front.  They do not want shares.  What they want from you is the right to twenty percent of the gold or silver you produce for the life of the mine.  You need the money, you accept, they fork over the cash, and the mine begins to produce.

It is unlikely that you will have to physically deliver twenty of the one hundred silver bars you produce each month to the Royalty company.  Complex bank exchanges suffice.  But it is clear that for the life of the mine you have to put money equivalent to the prevailing market value of twenty percent of your production into the Royalty company’s bank account each month.  You rue the day you let them in, but at least you have your mine and eighty percent of the product value to your credit.

For the shareholders of the Royalty company this is sweet.  Of course, they have risked twenty percent of the cost of developing your mine.  But there is no risk to them that you will blow the budget.  And as the price of silver goes up, so their income goes up.

The details vary of course, and there are many fine-print issues.  Not the stuff for blogs.   Here from Michael’s slides is some information about three such Royalty companies.

Franco-Nevada Corporation.  Franco-Nevada Corporation is a gold focused royalty and stream company with additional interests in platinum group metals and other resource assets.  The majority of revenues are generated from high margin assets in North America. The portfolio provides exposure to some of the largest gold discoveries in the world.  Franco-Nevada is generating growing cash flow and increasing dividends.

Silver Wheaton Corp.  Established in 2004, Silver Wheaton has quickly positioned itself as the largest metals streaming company in the world. The company currently has fifteen silver purchase agreements and three precious metal agreements where, in exchange for an upfront payment, it has the right to purchase all or a portion of the silver production, at a low fixed cost, from high-quality mines located in politically stable regions.

Sandstorm Gold. Sandstorm Acquires Precious Metals Stream from Colossus Minerals.  Sandstorm has agreed to purchase 1.5% of the gold and 35% of the platinum from the Serra Pelada Mine in Brazil.

And from the website of Gold Royalties Corporation—where you can find a good deal of additional detailed information on how the system works:

Welcome to Gold Royalties Corporation (TSXV:GRO). We are a mining royalty company focused on the acquisition and ownership of gold royalties. Our royalty interests are all located within Canada thereby providing our shareholders with significant mineral tenure security and exploration upside. We work with junior mining companies and individuals who are seeking to finance a mining operation, vend a royalty or accelerate producing assets for an upfront payment.

Fact is that mining royalties is not intuitively obvious, it is complex, and there are few current investment opportunities.  It may be that in future we see more such companies, but beware: the more such companies, the more likely they are to be less profitable.