What is a Gold Royalty?
A gold royalty is a contract that gives the owner (a gold royalty company) the right to a percentage of gold production or revenue in exchange for an upfront payment.
Gold royalty companies use these contracts as a way to finance mining companies in need of capital. This alternative form of mine financing is often more attractive than traditional debt or issuing equity. Gold royalty companies will also purchase pre-existing royalties as a way to build a diversified portfolio of royalty assets. Since royalties typically cover the life of a mine, gold royalty companies benefit from the exploration upside that may extend the life of the mine and thus increase the amount of gold (or revenue) they receive from the mining company at no additional cost.
Why Invest in Gold?
People have been investing in gold for thousands of years, but more recently gold has become a favored investment for many of the world’s central banks and institutional investors who control large amounts of the world’s capital.
Gold is an asset class that typically performs in the opposite direction of other investments such as the equities market and the US dollar. Because of this negative correlation, investors often use gold as a way to diversify risk within their portfolio. This investment strategy can be particularly effective during market crashes or in times of market volatility.
Watch Related Video – Investing In Gold Royalties
What are all the ways to invest in gold?
There are four main ways to invest in gold: physical gold, shares in mining companies, ETFs, and gold royalty companies. Each gold investment varies in terms of upside and risk profile.
WHAT IS THE DIFFERENCE BETWEEN A ROYALTY AND A STREAMING AGREEMENT?
Gold royalties and gold streams are very similar contracts. The primary difference is what the owner of the contract (the royalty company) receives in return for the upfront capital investment. In a royalty contract, the owner receives a percentage of revenue, called a Net Smelter Returns royalty (NSR), or a percentage of profit, called a Net Profit Interest royalty (NPI). In a streaming contract, the owner receives a percentage of the gold (or other by-product) produced from the mine. The royalty company then sells the gold at the current spot price in the open market to make a profit.
WHY SHOULD I OWN A GOLD ROYALTY COMPANY INSTEAD OF A MINING COMPANY?
Mining is a tough business and investing in operating companies can bring a lot of risk. Getting a gold mine into production requires enormous amounts of capital and many years. Once a mine is in production, there are also numerous operational risks that companies face. These include timing delays, mine shutdowns, and other environmental or social issues. Understanding and predicting which mine projects will make it into production and become profitable can be very difficult for the average investor.
With a gold royalty company, investors gain access to a large diversified mining portfolio that has been vetted by experienced geologists and mining engineers. This means that even if some projects never make it into production, a royalty company’s cash flow typically remains strong, even in a market downturn.
WHY HAVE I NEVER HEARD OF GOLD ROYALTIES?
While the royalty business model has been around for decades in other industries like music and oil & gas, the model has only been applied to the precious metals industry within the last 15 years. One of the first precious metal streaming companies was Wheaton Precious Metals (formerly Silver Wheaton).
WHAT DOES DUE DILIGENCE MEAN IN MINING?
Due diligence is the process of evaluating the geotechnical aspects and economics of a mining project. It is an essential process that requires expertise at the highest level to ensure a particular project is a viable investment. Sandstorm Gold Royalties has one of the largest technical teams of any gold streaming and royalty company in the world.