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.
An Introduction to MSCI ESG Indexes
With an extensive suite of ESG indexes on offer, MSCI aims to support investors as they build a more personalized and resilient portfolio.
An Introduction to MSCI ESG Indexes
There are various portfolio objectives within the realm of sustainable investing.
For example, some investors may want to build a portfolio that reflects their personal values. Others may see environmental, social, and governance (ESG) criteria as a tool for improving long-term returns, or as a way to create positive impact. A combination of all three of these motivations is also possible.
To support investors as they embark on their sustainable journey, our sponsor, MSCI, offers over 1,500 purpose-built ESG indexes. In this infographic, we’ll take a holistic view at what these indexes are designed to achieve.
An Extensive Suite of ESG & Climate Indexes
Below, we’ll summarize the four overarching objectives that MSCI’s ESG & climate indexes are designed to support.
Objective 1: Integrate a broad set of ESG issues
Investors with this objective believe that incorporating ESG criteria can improve their long-term risk-adjusted returns.
The MSCI ESG Leaders indexes are designed to support these investors by targeting companies that have the highest ESG-rated performance from each sector of the parent index.
For those who do not wish to deviate from the parent index, the MSCI ESG Universal indexes may be better suited. This family of indexes will adjust weights according to ESG performance to maintain the broadest possible universe.
Objective 2: Generate social or environmental benefits
A common challenge that impact investors face is measuring their non-financial results.
Consider an asset owner who wishes to support gender diversity through their portfolios. In order to gauge their success, they would need to regularly filter the entire investment universe for updates regarding corporate diversity and related initiatives.
In this scenario, linking their portfolios to an MSCI Women’s Leadership Index would negate much of this groundwork. Relative to a parent index, these indexes aim to include companies which lead their respective countries in terms of female representation.
Objective 3: Exclude controversial activities
Many institutional investors have mandates that require them to avoid certain sectors or industries. For example, approximately $14.6 trillion in institutional capital is in the process of divesting from fossil fuels.
To support these efforts, MSCI offers indexes that either:
- Exclude individual sectors such as fossil fuels, tobacco, or weapons;
- Exclude companies from a combination of these sectors; or
- Exclude companies that are not compatible with certain religious values.
Objective 4: Identify climate risks and opportunities
Climate change poses a number of wide-reaching risks and opportunities for investors, making it difficult to tailor a portfolio accordingly.
With MSCI’s climate indexes, asset owners gain the tools they need to build a more resilient portfolio. The MSCI Climate Change indexes, for example, reduce exposure to stranded assets, increase exposure to solution providers, and target a minimum 30% reduction in emissions.
An Index for Every Objective
Regardless of your motivation for pursuing sustainable investment, the need for an appropriate benchmark is something that everyone shares.
With an extensive suite of ESG indexes designed specifically for sustainability and climate change, MSCI aims to support asset owners as they build a more unique and personalized portfolio.
Tracked: The U.S. Utilities ESG Report Card
This graphic acts as an ESG report card that tracks the ESG metrics reported by different utilities in the U.S.—what gets left out?
Tracked: The U.S. Utilities ESG Report Card
As emissions reductions and sustainable practices become more important for electrical utilities, environmental, social, and governance (ESG) reporting is coming under increased scrutiny.
Once seen as optional by most companies, ESG reports and sustainability plans have become commonplace in the power industry. In addition to reporting what’s needed by regulatory state laws, many utilities utilize reporting frameworks like the Edison Electric Institute’s (EEI) ESG Initiative or the Global Reporting Initiative (GRI) Standards.
But inconsistent regulations, mixed definitions, and perceived importance levels have led some utilities to report significantly more environmental metrics than others.
How do U.S. utilities’ ESG reports stack up? This infographic from the National Public Utilities Council tracks the ESG metrics reported by 50 different U.S. based investor-owned utilities (IOUs).
What’s Consistent Across ESG Reports
To complete the assessment of U.S. utilities, ESG reports, sustainability plans, and company websites were examined. A metric was considered tracked if it had concrete numbers provided, so vague wording or non-detailed projections weren’t included.
Of the 50 IOU parent companies analyzed, 46 have headquarters in the U.S. while four are foreign-owned, but all are regulated by the states in which they operate.
For a few of the most agreed-upon and regulated measures, U.S. utilities tracked them almost across the board. These included direct scope 1 emissions from generated electricity, the utility’s current fuel mix, and water and waste treatment.
Another commonly reported metric was scope 2 emissions, which include electricity emissions purchased by the utility companies for company consumption. However, a majority of the reporting utilities labeled all purchased electricity emissions as scope 2, even though purchased electricity for downstream consumers are traditionally considered scope 3 or value-chain emissions:
- Scope 1: Direct (owned) emissions.
- Scope 2: Indirect electricity emissions from internal electricity consumption. Includes purchased power for internal company usage (heat, electrical).
- Scope 3: Indirect value-chain emissions, including purchased goods/services (including electricity for non-internal use), business travel, and waste.
ESG Inconsistencies, Confusion, and Unimportance
Even putting aside mixed definitions and labeling, there were many inconsistencies and question marks arising from utility ESG reports.
For example, some utilities reported scope 3 emissions as business travel only, without including other value chain emissions. Others included future energy mixes that weren’t separated by fuel and instead grouped into “renewable” and “non-renewable.”
The biggest discrepancies, however, were between what each utility is required to report, as well as what they choose to. That means that metrics like internal energy consumption didn’t need to be reported by the vast majority.
Likewise, some companies didn’t need to report waste generation or emissions because of “minimal hazardous waste generation” that fell under a certain threshold. Other metrics like internal vehicle electrification were only checked if the company decided to make a detailed commitment and unveil its plans.
As pressure for the electricity sector to decarbonize continues to increase at the federal level, however, many of these inconsistencies are roadblocks to clear and direct measurements and reduction strategies.
National Public Utilities Council is the go-to resource for all things decarbonization in the utilities industry. Learn more.
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