Royalties and stream 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.

Overview of a royalty

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 Resources, 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.

Overview of a stream

Types of natural resources 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.

Innovative structures

Our primary focus is on royalty and streaming transactions, however we will also review alternative structures that deliver superior long-term cash flows. An example would be the Denison financing arrangement executed in 2017 which was structured as a long-term loan with a separate stream element, deriving income from a tolling agreement on the McClean Lake uranium mill, which processes ore from the world class Cigar Lake uranium operation in Canada.

We will always look for ways of gaining exposure to tier one natural resource projects and sometimes this will involve creative thinking and structuring to support our main objective of acquiring royalties and streams.

Advantages for Ecora Resources

Investment proposition

  • Limited exposure to cost base with cash flows linked to production levels or revenues
  • High margin, scalable business with minimum management time required for existing portfolio
  • Long-term investment horizon covering multiple commodity cycles

Upside potential

  • Mine life extensions
  • Production upside
  • Opportunity to acquire secondary or existing royalties at attractive valuations

Advantages for project operator

Advantages versus debt financing

  • No maturity date when principal must be repaid or refinanced
  • No interest expense with royalty payments linked to revenues; ongoing payments to operator under streams
  • Often simpler to execute than a debt offering
  • Long-term investment horizon covering multiple commodity cycles

Advantages versus equity financing

  • Avoids equity dilution and dividend payments on equity
  • Bi-laterally negotiated and not dependent on the state of public capital markets

Ecora Resources as partner to the project operator

  • Full alignment of interests between Ecora Resources and natural resource company
  • Royalties and streams are generally structured to be asset specific, often leaving the remaining assets of the developer fully unencumbered for raising additional financing