How Do Royalty Companies Make Money?
After sitting down with a pretty astute investor the other day, he asked how exactly royalty companies worked and how they made money. It made me realize that most people have not been exposed to these companies and their business models. Let’s take a look at how these companies operate and where they are driving their revenue from.
What Royalty Companies Actually Do
We will be focusing here on what most people refer to as precious metals royalty companies (as opposed to oil and gas royalty companies that do basically the same thing with oil and gas rather than metals). Taken from a previous post, To put it simply, a precious metals royalty company owns the rights to the royalties or a portion of the royalties on a collection of different mines. The royalty itself is typically a small percentage of all the gold or other metal mined from the given area where the royalty applies. This royalty gives them an ongoing percentage of production from each mine. I thought Metalla Royalty (a relative upstart and up and comer in the royalty business) really nailed it with their recent video.
Where Royalty Companies Generate Revenue
Here is where it gets interesting. As mentioned previously, most people consider royalty companies to be precious metal royalty companies and focusing their attention on gold and silver production. What many people fail to realize is just how vast the underlying metals can be, as well as how different each company can vary based on where they generate revenue from. Seeking Alpha put out a robust chart of the top revenue generating royalty companies and included where their revenue was coming from.
Obviously Franco-Nevada is the leader in the royalty world and well known for their gold exposure, but I think many investors would be surprised to see that 17% (as of Q3 2021) was derived from energy related royalties. Likewise I find it interesting that Sandstorm Gold Royalties generates 4% of their revenue from diamond royalties. Upon further research, it seems that their diamond royalties come from the Diavik diamond mine in Canada. Here is what Sandstorm had to say on their site regarding this royalty.
The Diavik mine is Canada’s largest diamond mine, located on a 20 km2 island in Lac de Gras, Northwest Territories, approximately 300 km from Yellowknife. Access to the mine is by air year-round and by a 425 km ice road in winter that operates for eight to ten weeks between January and March. Four diamond bearing kimberlite pipes are located just off the eastern shore of the island and although the pipes are relatively small, each having surface expressions less than 200 metres in diameter, they are high grade making Diavik one of the most profitable diamond mines in the world. The majority of Diavik’s products are gem-quality white stones, which are sold to select diamantaires.
Diavik began extracting diamonds in January 2003 and has since produced more than 120 million carats of high quality rough diamonds from the A154 South, A154 North and A418 pipes.https://www.sandstormgold.com/our-royalties/diavik/
Royal Gold and Nomad Royalty both have exposure to copper which will be an essential metal as the world attempts to transition from carbon based energy to green or net zero carbon emissions energy. Copper is crucial in the production of batteries as well as conducting electricity. You can read more about copper becoming the new oil in our recent article. While there are some OTC market royalty companies (not publicly traded) that focus on renewable energy metals, it can be a benefit to gain exposure to these metals through precious metal focused companies that have greater diversification with their metal exposures.
Where to Start
When considering royalty companies as part of your investment portfolio, it’s best to take an overarching view of your holdings to understand your current exposure to different asset classes before diving in. An advisor that focuses on alternative asset classes, specifically precious metals and royalty companies that drive revenue from precious metals, can help guide you in developing an investment strategy to suits your needs. If you’d like to get started, reach out today!