Gold and Silver Royalty and Streaming Companies
Investing in precious metals often seems like it boils down to either buying the physical gold or silver or investing in shares of specific mining companies, both with their own very distinct advantages and risks.
Rather than having to settle for the simplicity of bullion or extensive research in individual mining companies, precious metals royalty and streaming companies provide investors with exposure to a diversified portfolio of miners’ revenues and produced metals.
These companies are not operators of mines. Instead, they seek to find undiscovered value by financing and working directly with miners to forge agreements that provide their shareholders with steady exposure to precious metals production.
This infographic from Empress Royalty outlines exactly how gold and silver royalty and streaming companies operate, and how they mitigate risk and create value for their shareholders.
What Do Precious Metals Royalty and Streaming Companies Do?
Royalty and streaming companies are an important part of the mining industry’s financial ecosystem, as they provide capital to mine operators and explorers in exchange for a percentage of revenue or metals produced from the mine.
Mining companies receiving this investment are able to further develop or expand projects, providing greater returns for both their shareholders and the companies with royalties and stream agreements on the projects.
These agreements typically last for the life of a mine, providing steady cash flow to royalty and stream holders while cutting out various risks associated with mining companies and operations.
“What it takes in the royalty business is patience and cash.”
– Pierre Lassonde, co-founder of the first royalty and streaming company, Franco-Nevada
The Difference Between Royalty Agreements and Streams
Royalty agreements and streams have similarities in their structure, but ultimately have some key differences.
- Royalty agreements, also called net smelter return (NSRs), provide the royalty holder a percentage of the mine’s revenue from production, typically around 1-3%. There are also other kinds of royalty agreements like net profits interests (NPIs), where the royalty holder receives a percentage of the profits rather than the revenue.
- Streams provide the right to purchase a certain percent (typically 5-20%) of metal production directly from the mine. Typically, streams will have an already decided purchasing price for the metal, which is usually either a fixed dollar amount or a fixed percentage of the spot price.
Royalties are more common than streams as they provide cash directly to the royalty company rather than the option to buy the physical metal which then needs to be sold.
While royalty and streams differ in what is delivered, both kinds of agreements avoid operational costs as they receive cuts from the top line.
The Growing and Diverse Landscape of Royalty and Streaming
The niche sector of gold and silver royalties has changed greatly since the founding of the original royalty business, Franco-Nevada in 1980.
While still fairly small today, the subsector has grown to have more than 10 companies with a market cap of $100M USD each, with five surpassing the $1B mark.
Here are the top 10 royalty and streaming companies by market cap:
|Company||Market Capitalization (USD)||Forward Dividend Yield|
|Wheaton Precious Metals||$17.8B||1.20%|
|Osisko Gold Royalties||$1.9B||1.39%|
|Metalla Royalty and Streaming||$368.3M||0.37%|
|EMX Royalty Corporation||$308.0B||0.00%|
Source: Yahoo Finance
While the three big names of Franco-Nevada, Wheaton Precious Metals, and Royal Gold tend to focus on larger and more secure ounce-producing agreements, the newer precious metals royalty companies start out by establishing a few cash-flowing agreements in their portfolio.
After this, they can begin targeting more speculative agreements with developing or exploration projects which are typically worth smaller dollar amounts and are slightly riskier or further from production, but have the potential of undiscovered upside.
Some royalty companies don’t even deal with mining companies at all, and focus exclusively on buying royalty and stream agreements held by third party companies or prospectors.
How These Companies Reduce Risk and Capture Upside
By avoiding many of the operational costs, royalty and streaming companies cut out a large amount of risk that is typically associated with mining investments.
In precious metal bull markets, it’s typical to see mining company revenues rise alongside the prices of gold and silver.
While mining companies’ operational costs will also rise, royalty and stream holders simply reap the benefits of high margins as they sell their physical metals at higher prices, despite having acquired them at lower fixed prices according to their agreement.
Another key advantage royalty and streaming companies have is their ability to diversify their portfolios and be selective with their agreements. This allows them to escape concentrated jurisdictional or asset risk and make agreements with mines which are already producing or close to production.
Since royalties and streams tend to last as long as the associated mine is operational, the holders of these agreements also benefit from any increased production or lifespan.
Royalty and Streaming Companies: Stable Exposure to Metals
As precious metals royalty and streaming companies are able to carefully choose their agreements and are overall less exposed to price downturns, they provide investors with a more stable investment in gold and silver.
Royalty and streaming companies typically have dividend policies which ensure shareholders are consistently rewarded with rising dividends, while many gold and silver mining companies cut dividends aggressively during precious metal market downturns.
As they help finance new projects and expansions, royalty and streaming companies take advantage of high margins in a unique form of financial arbitrage while providing their shareholders with stable exposure to precious metals and mining operations.
Visualizing the Global Silver Supply Chain
Nearly 50% of global silver production comes from South and Central America. Here’s a look at the global silver supply chain.
Visualizing the Global Silver Supply Chain
Although silver is widely known as a precious metal, its industrial uses accounted for more than 50% of silver demand in 2020.
From jewelry to electronics, various industries utilize silver’s high conductivity, aesthetic appeal, and other properties in different ways. With the adoption of electric vehicles, 5G networks, and solar panels, the world is embracing more technologies that rely on silver.
But behind all this silver are the companies that mine and refine the precious metal before it reaches other industries.
The above infographic from Blackrock Silver outlines silver’s global supply chain and brings the future of silver supply into the spotlight.
The Top 20 Countries for Silver Mining
Although silver miners operate in many countries across the globe, the majority of silver comes from a few regions.
|Rank||Country||2020 Production (million ounces)||% of Total|
|8||United States 🇺🇸||31.7||4.0%|
|18||Papua New Guinea 🇵🇬||4.2||0.5%|
|19||Dominican Republic 🇩🇴||3.8||0.5%|
|N/A||Rest of the World 🌎||34.2||4.4%|
Mexico, Peru, and China—the top three producers—combined for just over 50% of global silver production in 2020. South and Central American countries, including Mexico and Peru, produced around 390 million ounces—roughly half of the 784 million ounces mined globally.
Silver currency backed China’s entire economy at one point in history. Today, China is not only the third-largest silver producer but also the third-largest largest consumer of silver jewelry.
Poland is one of only three European countries in the mix. More than 99% of Poland’s silver comes from the KGHM Polska Miedź Mine, the world’s largest silver mining operation.
While silver’s supply chain spans all four hemispheres, concentrated production in a few countries puts it at risk of disruptions.
The Sustainability of Silver’s Supply Chain
The mining industry can often be subject to political crossfire in jurisdictions that aren’t safe or politically stable. Mexico, Chile, and Peru—three of the top five silver-producing nations—have the highest number of mining conflicts in Latin America.
Alongside production in politically unstable jurisdictions, the lack of silver-primary mines reinforces the need for a sustainable silver supply chain. According to the World Silver Survey, only 27% of silver comes from silver-primary mines. The other 73% is a by-product of mining for other metals like copper, zinc, gold, and others.
As the industrial demand for silver rises, primary sources of silver in stable jurisdictions will become more valuable—and Nevada is one such jurisdiction.
Nevada: The Silver State
Nevada, known as the Silver State, was once the pinnacle of silver mining in the United States.
The discovery of the Comstock Lode in 1859, one of America’s richest silver deposits, spurred a silver rush in Nevada. But after the Comstock Lode mines began declining around 1874, it was the Tonopah district that brought Nevada’s silver production back to life.
Tonopah is a silver-primary district with a 100:1 silver-to-gold ratio. It also boasts 174 million ounces of historical silver production under its belt. Furthermore, between 1900 and 1950, Tonopah produced high-grade silver with an average grade of 1,384 grams per tonne. However, the Second World War brought a stop to mining in Tonopah, with plenty of silver left to discover.
Today, Nevada is the second-largest silver-producing state in the U.S. and the Tonopah district offers the opportunity to revive a secure and stable source of primary silver production for the future.
Blackrock Silver is working to bring silver back to the Silver State with exploration at its flagship Tonopah West project in Nevada.
A Complete Visual Guide to Carbon Markets
Carbon markets are booming. But how do they work? In this infographic, we show how carbon markets are advancing corporate climate ambitions.
A Complete Visual Guide to Carbon Markets
Carbon markets enable the trading of carbon credits, also referred to as carbon offsets.
One carbon credit is equivalent to one metric ton of greenhouse gas (GHG) emissions. Going further, carbon markets help companies offset their emissions and work towards their climate goals. But how exactly do carbon markets work?
In this infographic from Carbon Streaming Corporation, we look at the fundamentals of carbon markets and why they show significant growth potential.
What Are Carbon Markets?
For many companies, such as Microsoft, Delta, Shell and Gucci, carbon markets play an important role in offsetting their impact on the environment and meeting climate targets.
Companies buy a carbon credit, which funds a GHG reduction project such as reforestation. This allows the company to offset their GHG emissions. There are two main types of carbon markets, based on whether emission reductions are mandatory, or voluntary:
Mandatory systems regulated by government organizations to cap emissions for specific industries.
Voluntary Carbon Markets:
Where carbon credits can be purchased by those that voluntarily want to offset their emissions.
As demand to cut emissions intensifies, voluntary carbon market volume has grown five-fold in less than five years.
Drivers of Carbon Market Demand
What factors are behind this surge in volume?
- Paris Agreement: Companies seeking alignment with these goals.
- Technological Gaps: Companies are limited by technologies that are available at scale and not cost-prohibitive.
- Time Gaps: Companies do not have the means to eliminate all emissions today.
- Shareholder Pressure: Companies are facing pressure from shareholders to address their emissions.
For these reasons, carbon markets are a useful tool in decarbonizing the global economy.
Voluntary Markets 101
To start, there are four key participants in voluntary carbon markets:
- Project Developers: Teams who design and implement carbon offset projects that generate carbon credits.
- Standards Bodies: Organizations that certify and set the criteria for carbon offsets e.g. Verra and the Gold Standard.
- Brokers: Intermediaries facilitating carbon credit transactions between buyers and project developers.
- End Buyers: Entities such as individuals or corporations looking to offset their carbon emissions through purchasing carbon credits.
Secondly, carbon offset projects fall within one of two main categories.
Avoidance / reduction projects prevent or reduce the release of carbon into the atmosphere. These may include avoided deforestation or projects that preserve biomass.
Removal / sequestration projects, on the other hand, remove carbon from the atmosphere, where projects may focus on reforestation or direct air capture.
In addition, carbon offset projects may offer co-benefits, which provide advantages that go beyond carbon reduction.
What are Co-Benefits?
When a carbon project offers co-benefits, it means that they provide features on top of carbon credits, such as environmental or economic characteristics, that may align with UN Sustainable Development Goals (SDGs).
Here are some examples of co-benefits a project may offer:
- Biodiversity: Protecting local wildlife that would otherwise be endangered through deforestation.
- Social: Promoting gender equality through supporting women in management positions and local business development.
- Economic: Creating job opportunities in local communities.
- Educational: Providing educational awareness of carbon mitigation within local areas, such as primary and secondary schools.
Often, companies are looking to buy carbon credits that make the greatest sustainable impact. Co-benefits can offer additional value that simultaneously address broader climate challenges.
Why Market Values Are Increasing
In 2021, market values in voluntary carbon markets are set to exceed $1 billion.
|Year||Traded Volume of Carbon Offsets (MtCO₂e)||Voluntary Market Transaction Value|
*As of Aug. 31, 2021
Source: Ecosystem Marketplace (Sep 2021)
Today, oil majors, banks, and airlines are active players in the market. As corporate climate targets multiply, future demand for carbon credits is projected to jump 15-fold by 2030 according to the Task Force on Scaling Voluntary Carbon Markets.
What Qualifies as a High-Quality Carbon Offset?
Here are five key criteria for examining the quality of a carbon offset:
- Additionality: Projects are unable to exist without revenue derived from carbon credits.
- Verification: Monitored, reported, and verified by a credible third-party.
- Permanence: Carbon reduction or removal will not be reversed.
- Measurability: Calculated according to scientific data through a recognized methodology.
- Avoid Leakage: An increase in emissions should not occur elsewhere, or account for any that do occur.
In fact, the road to net-zero requires a 23 gigatonne (GT) annual reduction in CO₂ emissions relative to current levels. High quality offsets can help meet this goal.
Fighting Climate Change
As the urgency to tackle global emissions accelerates, demand for carbon credits is poised to increase substantially—bringing much needed capital to innovative projects.
Not only do carbon credits fund nature-based projects, they also finance technological advancements and new innovations in carbon removal and reduction. For companies looking to reach their climate ambitions, carbon markets will continue to play a more concrete role.
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