Investing in royalty financing and emerging commodities outside of gold and silver is increasingly attractive due to the lower risk and the ability to provide leverage on commodity prices and exposure to commodities in demand and their price fluctuations.
In recent years, royalty and streaming companies have quickly become a popular choice among a wide range of investors. They provide the capital needed to finance many of the world’s most promising mining projects to provide investors with a perfect storm of minimized risk and economic benefits.
With unprecedented exploration, diversification and project acquisition opportunities, this particular type of alternative financing could experience significant expansion over the next decade.
What is royalty streaming?
Marin Katusa, president of Katusa Research, told Kitco News in an interview: “I would start with the royal side of things…
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Royalty agreements and streams have similar structures at face value, but there are key differences that set them apart.
- Royalty agreements: Also known as net smelter returns, these agreements provide royalty holders with a percentage of a specific mine’s income generated through production, typically ranging between one and three percent. Another common type of royalty agreement includes interest on net profits, where the royalty holder receives a percentage of the profits rather than the income.
- Streams: These contractual agreements give the right to buy a certain percentage of the metal production directly from the mine, generally ranging from five to twenty percent. Flows often have a predetermined purchase 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 companies and streaming companies is that these entities are not miners. Instead, they seek to find untapped value by financing and working with miners to strike deals that provide their shareholders with constant exposure to various mineral and metal markets. These agreements allow beneficiary mining companies to develop or expand projects further, providing better returns for vested interests and companies with royalties and flow agreements on projects.
For junior mining companies, funding and supporting more established royalty and streaming players can be particularly beneficial, as it can significantly boost development and exploration efforts and improve the balance sheets of highly promising project portfolios.
Risks and Benefits of Royalty Streaming
In the case of royalty streaming, describing the main pros and cons can paint a clearer picture of the potential downsides of these deals and what makes them one of the most popular financial strategies in 2021.
One of the main disadvantages of royalty streaming is the structure of the business. Royalty and streaming companies have traditionally had intense competition in the precious metals space and needed a large amount of capital to invest in mines, which are raised through stock or debt. Either companies have accumulated debt on their balance sheets or they are issuing shares, which can lead to unfavorable dilution of shares. However, there are very few royalty groups focused on clean energy metals and transaction costs have been much lower so far.
Another risk relates to actual spot prices and mining production. If spot prices go down, the revenue generation for royalty companies and the selling prices of metals for streaming may also go down. In addition, in the case of delays in mines, both types of businesses can be affected by a delay in the movement of goods. Fortunately, there is no charge to hold a royalty, so there are no operating costs associated with closures, and the general and administrative costs required to run the royalty companies are very low. .
By avoiding many operational costs, royalty and streaming companies eliminate the significant risks commonly associated with mining investments. While mining companies’ operating costs may increase, royalty and stream holders simply enjoy the potential benefits of high margins during times of peak prices for their metals, having acquired them at lower fixed prices in accordance with their OK.
Another key advantage of royalty and streaming companies is the beneficial diversification of their portfolio and the ability to be selective in their deals. With the right management and strategic acquisition team, companies can minimize concentrated skill or asset risk and close deals with mines already at a production stage in the short term. Since costs per ounce are contractually defined, this also protects streamers from cost overruns throughout the life of a mine.
Electric Royalties (TSXV: ELEC) is a high-end portfolio-building royalty company that leverages demand for a wide range of critical commodities and metals like lithium, vanadium, manganese , tin, graphite, cobalt, nickel and copper. The focus on the vital elements of batteries and base metals takes advantage of the growing demand and the global trend towards electrification in virtually all sectors, including transportation, rechargeable batteries, energy storage large-scale, renewable energy production and more.
The company has a strong commodity portfolio, which helps to diversify investments and mitigate risks for investors and shareholders while leveraging exploration, revenue-driven business modeling and more Again. It currently holds a portfolio of 12 royalties with exceptional exploration potential and four additional royalties in the process of being acquired.
Electrification: growing market for royalty streaming companies
The mining and streaming royalty industry has grown steadily, from US $ 2.1 billion in 2010 to over US $ 15 billion in 2019. While gold and silver occupy a large part In the streaming market, promising metals like copper and cobalt continue to show exceptional growth potential as the world turns to greener alternatives to energy, electricity and more. Market researchers expect a bright future for both commodities despite production disruptions in 2020.
Year to date:
- Lithium prices rose 313%
- Copper prices rose 25%
- Zinc prices increased 22%
- Nickel prices increased by 18%
- Tin prices increased 82%
- Cobalt prices increased 75 percent
These commodities expose potential investors and many royalty distribution companies to multiple industries, including new economy engines like electric vehicles, batteries, energy storage, personal electronics, and digital platforms. renewable energy, particularly wind and solar. .
Nova Royalty (TSXV: NOVR) is a royalty company focused on the discovery of copper and nickel as fundamental components of clean energy decarbonization. With a rich portfolio of base metal royalty assets operating in mining-friendly and very promising mining jurisdictions, Nova could become a leading royalty company in the transition to the energy future. sustainable.
With the battery revolution and the growing demand for copper and nickel, the company has also strategically positioned itself as a potential forerunner in the transition to an electric world. As a royalty company, it presents reduced risk across a global portfolio.
Royalty financing: economic growth potential for investors
For investors, royalty and streaming companies continue to be increasingly attractive due to their lower risk and ability to provide leverage on commodity prices and exposure to in-demand commodities. and their price fluctuations. In addition, investors in streaming companies take advantage of the ability to contract metal prices and delivery and tailor metal exposure more than royalty companies can.
Innovative companies are capitalizing on the momentum of the decarbonization shift to green energy and investing in these companies outside of markets for precious metals like gold and silver. With unprecedented demand and price growth for these commodities, market researchers are predicting more investment opportunities in the sector for royalty and streaming companies exposed to these commodities.
To take with
Royalty and streaming companies present unprecedented investment opportunities with the benefits of low-risk and stable diversified exposure to the metals and minerals market and support for very promising mining projects around the world. With no exposure to issues such as operating cost pressures or capital cost overruns due to pre-determined metal pricing and income generation agreements, it is no surprise that the royalty financing has become an important strategy used by new and experienced investors.
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