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How Royalty Companies Manage Risk for Superior Returns

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The following content is sponsored by Nomad Royalty

Balancing Risk for Royalty Companies vs. Mining Companies

Risk is at the forefront of every company’s decision-making, especially for mining companies that operate large-scale mines in various jurisdictions.

While producing precious metals naturally carries a variety of risks, there is another way to get exposure to precious metals production with much lower risk: royalty companies.

Royalty companies provide up-front capital to miners in exchange for royalties on future mine production, providing a steady stream of revenue and precious metal exposure with far less risk attached to the company.

This graphic sponsored by Nomad Royalty looks at the risks royalty companies and mining companies face, and how royalty companies are able to mitigate and diversify with more flexibility to deliver stronger returns.

Trimming from the Top Line

By providing capital in exchange for a royalty or stream on a mine, royalty companies are an essential part of mine funding across the world. Along with competitively priced capital for mine developers, the lifetime royalties or streams received in return ensure royalty companies are invested in a mine’s lifelong success.

Mining royalty: A recurring percentage (typically between 0.5% to 3%) of revenue generated from a mine’s ore and mineral sales, paid out to the royalty holder.

Mining stream: An agreement for a recurring purchase of a percentage of a mine’s produced metals, at a previously agreed upon price (typically lower than the metal’s current market value). Typically mines will offer streams on metal by-products of the mine.

Royalties and streams are known as non-participating interests, meaning that the holders (royalty companies) have no obligation or expectation to further fund or assist with the mine’s production.

Along with this, royalties are from a mine’s top line revenue, meaning that the percentage given to royalty holders is calculated before operational expenses, sales costs, and other expenses are deducted. The difference between top line revenue and profit after expenses can be massive, changing the value of a royalty by millions of dollars.

YearVeladero Mine RevenueProfit after AISC Deducted2.5% Royalty of Revenue2.5% Royalty of Profit
2015$720M$106M$18M$3.7M
2016$685M$252M$17M$6.3M
2017$788M$219M$20M$5.5M
2018$732M$90M$18M$2.3M
2019$772M$166M$19M$4.2M
2020$666M$62M$17M$1.5M

Source: Mining Data Online

Both of these factors have a massive impact on the value of a royalty, as they ensure steady revenue shielded from the mine’s operational costs while requiring no maintenance or upkeep from the holder.

Sleeker Business, Lower Expenses

The nature of royalty companies naturally enables them to be lightweight businesses with incredibly low expenses. Compared to the many employees with varying skills needed to manage orebody exploration, project construction, and daily mine operations, royalty companies only require a tight team of specialized individuals.

While the top three gold mining companies (Newmont Goldcorp, Barrick Gold, and Newcrest Mining) have an average of around 15,500 employees each, the top three precious metals royalty companies (Franco-Nevada, Wheaton Precious Metals, and Royal Gold) each have less than 50 employees.

With minimal G&A expenses and no exposure to fluctuating operational costs, royalty companies skirt large amounts of operational risk compared to mining companies. Setting up a royalty agreement carries far less risk and takes much less time compared to developing a mine, meaning royalty companies can be much more nimble and lock down future revenue more easily.

This protection from operational risk allows for steadier revenue to ride out the bumpy market cycles commodities can have, and royalty companies typically have dividend policies to reflect this operational and financial stability.

More Freedom to Diversify Risk

The lightweight nature of royalty companies allows them more freedom and flexibility to diversify a variety of risks. By spreading out their capital properly, many of the risks mining companies struggle to avoid can be easily sidestepped by a royalty company.

While many mining companies tend to cluster their operations in single regions based on the assets they own or can purchase, royalty companies can more freely decide on which jurisdictions to set up royalty agreements. This also includes the perk of spreading out counterparty risk, as royalty companies can choose to work with a diverse selection of mine operators.

Along with diversifying royalties across jurisdictions and counterparties, royalty companies can carefully tune their portfolio’s exposure to specific commodities, unlike mining companies who cannot change what they find underground.

Royal Rewards for Reduced Risk

If having reduced exposure to this variety of risks wasn’t enough, royalty companies reap a variety of benefits compared to mine operators. Since royalty and stream agreements often last for the life of a mine, royalty holders receive the benefits of resource extension and mine expansion at no additional cost.

They also benefit from increases in precious metals prices, as increases in a mine’s revenue is reflected for royalty and stream holders as well. In times of metals price downturns, royalty companies are protected by their high margins and can use their cash reserves and credit to invest in royalties at a discount.

With far more freedom and flexibility in diversifying their risk, precious metals companies like Nomad Royalty provide investors exposure to gold and silver while protecting them from the many risks that plague the mining industry.

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Misc

What is the FIFA World Cup Trophy Made Of?

This infographic explores the history and composition of the FIFA World Cup trophy ahead of the 22nd edition of the competition.

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What is the FIFA World Cup Trophy Made Of?

Soccer is one of the world’s most popular sports with approximately 3.5 billion fans globally.

It was in Uruguay, in 1930, that the very first FIFA World Cup was held. It has occurred once every four years since then (except in 1942 and 1946 due to World War II).

This year, 92 years after its start, the 22nd FIFA World Cup tournament is scheduled to take place in Qatar. The highly anticipated event involves 32 national teams that will compete to win one of the most prestigious titles and a historic trophy.

So, what is the coveted FIFA World Cup trophy made up of?

The History and Composition of FIFA World Cup Trophies

Since its debut in the first FIFA World Cup tournament, in 1930, there have been two iterations of the World Cup trophy. Both trophies were made with a combination of metals and rare stones.

Until 1970, the Jules Rimet Trophy, designed by the French sculptor Abel Lafleur, glorified the winning team. A redesigned version of the trophy by Silvio Gazzaniga replaced the original in the 1974 FIFA World Cup tournament.

The Jules Rimet Trophy

Commonly called the Coupe du Monde (French for World Cup), the Jules Rimet trophy was officially renamed in 1946, honoring the then FIFA president Jules Rimet on his 25th Anniversary in office.

The trophy had a height of 35cm and weighed 3.8kg. It was made of gold-plated sterling silver and featured Nike, the Greek Goddess of Victory, holding an octagonal cup. The base of the trophy was made from a semi-precious stone called lapis lazuli. Golden plates were attached to each side of the base and they held the names of the winning teams from 1930 to 1970.

Since the beginning, it was agreed that the first team to win the World Cup three times would get to permanently keep the trophy. In 1970, Brazil marked its third victory by beating Italy in the finals and took the Jules Rimet trophy home.

However, in 1983, the trophy that even survived World War 2 was stolen from the Brazilian Football Confederation (CBF) headquarters in Rio de Janeiro and was never found. The only original piece of the Jules Rimet trophy in existence is the base that was replaced in 1954 to accommodate more winning-team names.

The FIFA World Cup Trophy

After handing over Abel Lafleur’s original trophy to Brazil in 1970, FIFA held a design competition in search of a new World Cup trophy. The association received 53 submissions from seven countries and Silvio Gazzaniga’s design of two human figures holding the Earth in their hands won the competition.

This new trophy is 36.5cm tall and weighs 6.17kg. It is made from 5kg of 18-karat gold and two layers of malachite. The base of the trophy is 13cm in diameter and the names of all winning teams since 1974 along with the years are engraved on it. This current iteration of the World Cup trophy can accommodate the names of 17 winning countries and years.

Unlike the Jules Rimet trophy, the current iteration of the trophy will not be handed over to a team definitively. It permanently belongs to the International Federation of Association Football (FIFA) and is secured at its Zurich headquarters.

However, a gold-plated bronze replica of the cup referred to as the World Cup Winners’ Trophy is given to every winning team.

Battle Royal: The 2022 FIFA World Cup

The 2022 FIFA World Cup tournament is long awaited by billions of passionate soccer fans.

It could be the final opportunity for two of the world’s best players—Cristiano Ronaldo, and Lionel Messi—to lift the World Cup trophy as they supposedly plan to retire from international games before the next World Cup.

This year, will your favorite national team be able to pose for a victory picture holding the golden trophy in their hands?

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Misc

Ranked: The World’s Top Cotton Producers

As the most-used natural fiber, cotton has become the most important non-food agricultural product.

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Top-Cotton-Producers

The Top Cotton Producers

Cotton is present in our everyday life, from clothes to coffee strainers, and more recently in masks to control the spread of COVID-19.

As the most-used natural fiber, cotton has become the most important non-food agricultural product. Currently, approximately half of all textiles require cotton fibers.

The above infographic lists the world’s top cotton producers, using data from the United States Department of Agriculture.

Fancy Fabric

Originating from the Arabic word “quton,” meaning fancy fabric, cotton is a staple fiber made up of short fibers twisted together to form yarn.

The earliest production of cotton was around 5,000 B.C. in India, and today, around 25 million tons of cotton are produced each year.

Currently, five countries make up around 75% of global cotton production, with China being the world’s biggest producer. The country is responsible for over 23% of global production, with approximately 89 million cotton farmers and part-time workers. Cotton’s importance cannot be understated, as it is the primary input for the Chinese textile industry along with many other nations’ textile industries.

Top Cotton Producers2020/2021 (metric tons)2021/2022 (metric tons)
🇨🇳 China 6,445,0005,835,000
🇮🇳 India6,009,0005,334,000
🇺🇸 United States3,181,0003,815,000
🇧🇷 Brazil2,356,0002,504,000
🇦🇺 Australia610,0001,252,000
🇵🇰 Pakistan 980,0001,306,000
🇹🇷 Turkey631,000827,000
🌐 Other 4,059,0004,282,000
Total24,271,00025,155,000

The United States is the leading global exporter of cotton, exporting three-fourths of its crop with China as the top buyer.

Despite its importance for the global economy, cotton production faces significant sustainability challenges.

The Controversy Over Cotton

Cotton is one of the largest users of water among all agricultural commodities, and production often involves applying pesticides that threaten soil and water quality.

Along with this, production often involves forced and child labor. According to the European Commission, child labor in the cotton supply chain is most common in Africa and Asia, where it comes from small-holder farmers.

In 2020, U.S. apparel maker Patagonia stopped sourcing cotton from the autonomous territory of Xinjiang because of reports about forced labor and other human rights abuses against Uighurs and other ethnic minorities.

L Brands, the parent company of Victoria’s Secret, has also committed to eliminating Chinese cotton from its supply chain. Whether these changes in supply chains impact China’s cotton production and its practices, cotton remains essential to materials found across our daily lives.

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