E Royalty Stocks: 14 Precious Metals "Miners" That Don't Mine

In mining, the safest bets are the royalty and streaming (R&S) companies that don’t actually mine metal themselves but contract with other mines to take part of their future output. Here's why.

Gold, Ingots, Treasure, Bullion, Gold Bars, Wealth

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R&S companies serve as specialized financiers that help fund exploration and production projects for cash-strapped mining companies. In return, they receive royalties on whatever the project produces, or rights to a “stream,” an agreed-upon amount of gold, silver, or other precious metal.

  • Under a metal streaming agreement, the streaming company provides an upfront payment to acquire the right to future deliveries of a predefined percentage of metal production of a mining operation.
    • They pay ongoing payments - a fixed sum per troy ounce of gold mined, a percentage of the prevailing metal price, or a combination of both - that are usually well below the market price of the metal.
  • A royalties type arrangement usually applies to a small fraction of the mining project production (usually 1-3%) and is not connected with ongoing payments. They can have various forms, but the most common is a small percentage of the net smelter return (“NSR”). The NSR is calculated as revenues from the sale of the mined products minus transportation and refining costs.

Advantages of Royalty/Streaming Companies

  • Leverage to commodity prices
  • Fixed operating & cash costs ensuring consistent and ongoing strong margins
  • Exploration & mine expansion upside at no additional cost
  • No Capex or cost overrun exposure
  • No limit to growth as execution risk does not rise with each acquisition
  • No dilution
  • Agreements with multiple miners spread & mitigate any potential risk
  • Benefit immensely if new zones are discovered and actual production comes in higher than originally forecast
  • Enjoy a favorable tax situation courtesy of the Canadian Government. As long as they reinvest their proceeds or pay it out as dividends, they are gifted with a tax rate in the neighborhood of 0-8%. That’s a huge advantage when it comes to net profit margin. 
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