What is a Royalty?
A royalty is a payment to a royalty holder by a property owner or an operator of a property and is typically based on a percentage of the minerals or other products produced or the revenues or profits generated from the property. The granting of a royalty to a person usually arises as a result of paying part of the consideration payable to land owners, prospectors or junior mining companies for the purchase of their property interests; providing capital in exchange for granting a royalty; or converting a participating interest in a joint venture relationship into a royalty.
Royalties are not typically working interests in a property. Therefore, depending on the nature of the royalty interest and the laws applicable to the royalty and project, the royalty holder is generally not responsible for, and has no obligation to contribute, additional funds, including, but not limited to, operating or capital costs, or environmental or reclamation liabilities. Typically, royalty interests are established through a contract between the royalty holder and the property owner, although many jurisdictions permit the holder to also register or otherwise record evidence of a royalty interest in applicable mineral title or land registries. The unique characteristics of royalties may provide royalty holders with special commercial benefits not available to the property owner because the royalty holder may enjoy the upside potential of the property with reduced risk.
What are the common types of Royalty?
GRR (gross revenue royalties) and GORR (gross overriding royalties) are based on the total revenue stream from the sale of production from the property, which can sometimes include deductions.
NSR royalties (net smelter return royalties) are based on the value of production or net proceeds received by the operator from a smelter or refinery. These proceeds are usually subject to deductions or charges for transportation, insurance, smelting and refining costs, as set out in the royalty agreement. For uranium royalties, the deductions are generally minimal, while for base metal projects the deductions can be much more substantial. This type of royalty generally provides cash flow that is free of any operating or capital costs and environmental liabilities. A smaller percentage NSR royalty in a project can effectively equate to the economic value of a larger percentage profit or working interest in the same project.
NPI royalties (net profit interest royalties) are based on the profit realized after deducting costs related to production. Although the royalty holder is generally not responsible for providing capital, covering operating losses or environmental liabilities, increases in production costs will affect net profits and royalties payable.
Fixed royalties are paid based on a set rate per tonne mined, produced or processed or even a minimum for a period of time rather than as a percentage of revenue or profits. These types of royalties are more common for iron ore, coal and industrial minerals and usually do not have exposure to changes in the underlying commodity price.
Production royalties ("PR") are typically based on metal produced, often at a predetermined fixed price.
What is a Stream?
The Company does not currently hold any streaming interests. However, part of our strategy includes the potential acquisition of streams on primary uranium and uranium by-product assets.
Streams are distinct from royalties. They are metal purchase agreements where, in exchange for an upfront deposit and ongoing payments for metal delivered, the holder purchases all or a portion of one or more metals produced from a mine, at a pre-set price. In the case of uranium, the agreements typically provide for the purchase price to be the spot price at the time of delivery with a fixed price per pound payable in cash and the balance paid by applying the upfront deposit. Once the upfront deposit is fully applied, the purchase price is typically, in the case of streams, which provide for a fixed price per pound as opposed to a percentage of the spot price, the lesser of the fixed price per pound payable in cash and the spot price at the time of delivery. Uranium streams are well suited to co-product production, providing incentive to the operator to produce uranium on top of the more primary metals. As streams can also be used to finance a project, the stream structure may help maintain the borrowing capacity for the project. Streams can provide higher leverage to commodity price changes as a result of the fixed purchase price per pound.