Resource investors drawn to the sector’s upside but nervous about the higher risk might want to consider royalty companies instead.
Royalty companies act as alternative financiers to help fund exploration and production projects for explorers and miners in need of money but who do not want to issue more equity (company shares).
In return for cash, royalty companies will receive a percentage of future production revenue. And, unlike traditional mining companies that are subject to input costs that vary (fuel, equipment, labour), royalty companies receive all their revenue from the agreements they negotiate and the cost of those revenues are the responsibility of a project’s owners/operators.
As a result, royalty companies have high profit margins along with among the most revenue per employee of any industry.
Also, whereas many junior mining companies have a single project in one country, royalty companies provide portfolio diversification by having agreements with several companies in different jurisdictions throughout the world. This reduces jurisdictional risk, project/production risk, and commodity-price risks that have plagued many mining companies in the past.
Given that a royalty is a perpetual option on new discoveries made on the land by the operators, royalty companies offer substantial exploration upside for their investors at no additional costs. And, if the price of the commodity rises, it expands their profit margins even more seeing that the royalty is a fixed cost.
One of the biggest, and probably best known, royalty companies in the business is Franco-Nevada Corporation (TSX:FNV), a more than C$35 billion market cap gold-focused royalty and streaming company, which has rewarded investors with a 27% average annual return over the past five years and a more than 1,166% cumulative return since Franco went public in late 2007 (as of the closing stock price on September 13, 2023).
More recently, in the small-cap space, Metalla Royalty & Streaming Ltd (TSX-V:MTA) announced an agreement to acquire Nova Royalty Corp. (TSX-V:NOVR) in an all-stock transaction valued at C$190 million, with the combined company set to own a portfolio of 105 royalties and streams.
The pending transaction could spark interest in other smaller royalty companies, such as Electric Royalties Ltd (TSX-V:ELEC, OTC:ELECF) and TNR Gold Corp (TSX-V:TNR, OTC:TRRXF).
Electric Royalties owns a growing portfolio of 22 royalties on clean-energy metals, including two royalties that currently generate revenue.
In July 2023, the company announced that it has exercised its option to increase its existing 0.75% Gross Revenue Royalty (GRR) on the producing Penouta tin-tantalum mine in Spain by a further 0.75% and now holds an 1.5% GRR on Penouta.
Also in July, Fundamental Research analysts published a research report that estimates Electric Royalties having the potential to generate $10 million plus in royalties revenue by 2026-2027.
Another promising royalty name is TNR Gold Corp (TSX-V:TNR, OTC:TRRXF), a green energy metals royalty and gold company.
TNR holds a 1.5% net smelter return (NSR) royalty on the Mariana Lithium Project in Argentina, which is 100% owned by Ganfeng Lithium. Construction of a 20,000 tons-per-annum lithium chloride plant at Mariana has already begun.
As well, TNR Gold holds a 0.4% NSR Royalty on the Los Azules copper, gold and silver project, also in Argentina, being developed by McEwen Mining, which the company called the world’s nineth largest undeveloped copper project.
The company also holds a 7% net profits royalty (NPR) on the Batidero I and II properties of the Josemaria Project in Argentina, which is being developed by Lundin Mining.
Finally, TNR provides significant exposure to the gold sector through its 90% holding in the Shotgun Gold porphyry project in Alaska, near the Donlin Gold project that is being developed by Barrick Gold and Novagold Resources.
Thus, with the expected increase in demand for clean-energy commodities, such as copper, nickel, lithium and cobalt, prices for these metals and minerals are poised to continue moving higher in the future, especially given that economically viable deposits are becoming more difficult to find.
All of which bodes well for resource companies and resource royalty stocks in particular.
Contact Sean at sean@proactiveinvestors.com