How Royalty Companies Manage Risk for Superior Returns
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.
|Year||Veladero Mine Revenue||Profit after AISC Deducted||2.5% Royalty of Revenue||2.5% Royalty of Profit|
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.
Mapped: U.S. Mineral Production Value by State in 2022
U.S. mineral production value increased by 4% YoY in 2022 to reach $98.2 billion. Which states contributed the most to domestic mineral production?
U.S. States Ranked by the Value of their Mineral Production
The U.S. produced $98.2 billion worth of nonfuel minerals in 2022, but which states made up the majority of the mining?
This map uses data from the USGS to map and rank U.S. states by the value of their nonfuel mineral production in 2022.
The ranking takes into account the mining of nonfuel minerals that are split into two main categories: metallic minerals (like gold, copper, or silver), and industrial minerals (like phosphate rock, various types of clay, and crushed stone).
The Top Mineral-Producing States in the U.S.
Arizona tops the list of mineral-producing states, with $10.1 billion worth of minerals which account for 10.3% of the U.S. total, largely due to the state’s prolific copper production. The state of Arizona accounted for around 70% of domestic copper production in 2022, and as a result also produces large amounts of molybdenum as a byproduct.
The state of Nevada was the next top mineral producer at $8.9 billion worth of minerals, thanks to its longstanding leadership in gold mining (accounting for 72% of U.S. gold production in 2022) and by having the only operating lithium project in America.
States in the Western region of the U.S. dominate the ranking of top mineral-producing states, holding the top two spots and making up half of the top 10 when it comes to total mineral production value.
|Rank||State||Mineral Production Value (2022)||Share of U.S. total|
*The value of these states is a partial total which excludes withheld values by the USGS to avoid disclosing company proprietary data. Rankings remain unaffected which is why some states may rank higher than others despite having a lower value.
Texas rounds out the top three at $8 billion worth of minerals produced in 2022, largely thanks to its dominant production of crushed stone. The state of Texas was the top producer of crushed stone in 2022 at more than $2.8 billion worth, nearly double that of the next largest producer, Florida, which produced $1.5 billion worth.
What Minerals is the U.S. Producing the Most of?
Nonfuel mineral production is categorized into two main categories by the USGS, metals/metallic minerals and industrial minerals.
While not as shiny, the produced value of industrial minerals far outweighs that of metallic minerals. While $34.7 billion worth of metals were produced in 2022, industrial mineral production value was nearly double at $63.5 billion.
Construction aggregates like construction sand and gravel along with crushed stone made up almost half of industrial minerals production at $31.4 billion, with crushed stone being the leading mineral commodity overall at $21 billion of production value.
Following crushed stone, the next top minerals produced but the U.S. were (in decreasing order of value): cement, copper, construction sand and gravel, and gold.
Although the value of metals production decreased by 6% compared to 2021, industrial minerals production increased by 10% year-over-year, resulting in an overall increase in America’s overall nonfuel mineral production of 4%.
Visualizing the Opportunity Cost of Unrecycled Metals in the U.S.
Exploring the quantity and dollar value of recycled metals in the U.S. by visualizing metal recycling ratios.
The Opportunity Cost of Unrecycled Metals in the U.S.
Metals are an essential resource for modern society, used in everything from construction and transportation to technology and medical equipment. As the demand for these minerals continues to grow, so does the amount of waste generated by their production and consumption.
Recycling this metal waste is not just a win for sustainability; it also has huge economic benefits. In the visual above, we explore the ratio of recycled vs. unrecycled metals in the U.S. using 2020 Recycling Statistics by the U.S. Geological Survey.
Metal Recycling in the U.S.
Opportunity cost is a concept that refers to the benefits that are forgone when choosing one option over another. In the case of unrecycled metals, the opportunity cost is the potential economic and environmental benefits that could have been achieved through increasing metal recycling ratios.
Below are the recycling rates for select metals in the U.S. in 2020.
|Metal||% of supply recycled|
|Iron & Steel||52|
The above recycled metals represented a dollar value of $26 billion in 2020. Their unrecycled counterparts, on the other hand, represented $28 billion.
Metals can either be recycled from scrap that results from the manufacturing process (known as “new scrap”) or scrap from post-consumer products (“old scrap.”) Regardless of the source, many of them, especially chromium, copper, and tin, have the potential to reap further sustainability and economic benefits by recycling a larger proportion of their scrap supplies.
The Case for Metal Recycling
When compared with the mining, processing and transport of new metals, recycling metals can provide a significantly less energy-intensive alternative, saving enough energy each year to power millions of homes in the U.S.
Recycling metals can also save natural resources, create more green jobs, and reduce a country’s dependency on mineral imports by supplementing its supply of raw materials.
Overall, the potential for metal recycling is vast, and taking steps to increase the amount of recycled metals in the U.S. can lead to even greater sustainability and economic benefits.
Electrification2 years ago
Ranked: The Top 10 EV Battery Manufacturers
Real Assets2 years ago
Visualizing China’s Dominance in Rare Earth Metals
Real Assets2 years ago
The World’s Top 10 Gold Mining Companies
Electrification1 year ago
The Key Minerals in an EV Battery
Misc2 years ago
All the World’s Metals and Minerals in One Visualization
Misc2 years ago
All the Metals We Mined in One Visualization
Real Assets2 years ago
What is a Commodity Super Cycle?
Real Assets2 years ago
How the World’s Top Gold Mining Stocks Performed in 2020