Posted 24th April 19
Mining royalties can be a complex area of mining finance, and differ from mining streaming opportunities in a number of ways.
A royalty is a right to receive payment based on a percentage of the minerals or other products produced at a mine or of the revenues or profits generated from the sale of those minerals or other products at a mine. Like mining streaming, royalties offer a payment to the investor based on the production of the mine though entirely around the sale of the product rather than ownership of a percentage.
In the context of alternative finance, a royalty typically involves a one-off up-front payment from the royalty holder in return for which it receives a contractual undertaking from the mining company to pay a specified percentage of future revenue. Mining companies can use the up-front payment for a variety of purposes; funding capital expenditure, general working capital, making acquisitions and even (as is the case for the recent Anglo Pacific/Denison Mines transaction) funding exploration of other unconnected assets.
Royalties can be granted at various stages of a mining company’s lifecycle, and for a variety of purposes. For example, they have been used as a substitute for seed-equity in order to fund feasibility studies and have been provided as a substitute to debt in order to fund the development or construction of assets.
Royalty financing arrangements offer a number of advantages to small businesses. Compared to equity financing, royalty financing enables entrepreneurs to obtain capital without giving up a significant ownership position in the company to outside investors. Royalty financing also increases a company’s ability to structure deals with individual investors, who might be attracted to the idea of receiving a monthly or quarterly yield over the life of their investment. In contrast, equity financing arrangements often show no yield until the stock is sold.
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