The sale of royalties is sometimes used as a method of finance for early-stage mining projects.
A typical arrangement would invlove a finance institution purchasing a mining royalty during the development stage of a new mining project. The royalty entitles the institution to a certain percentage of the future anticipated revenue from the mine and the operator can use the cash from the sale to progress the project towards production.
The percentage rate of the royalty will vary from project to project, but is typically in the range 1-3% and usually remains payable during the entire life of the mine. Payments must be made on a regular basis - often quaterly. Royalty financing is best suited to operations in countries with stable legal jurisdictions as this will greatly assist the finance institution should it ever have to seek enforcement of its rights.
There are several potential advantages for both sides in the transaction:
Advantages for the operator:
- Immediate access to funds at the pre-revenue stage.
- Unlike debt, there are no payments to make until the operation is generating cash.
- Less dilutive of EPS than issuing equity.
- Royalties have no impact on the operator's balance sheet, unlike debt.
- Unlike equity, royalties are normally tax deductible.
- Arrangement fees are very low compared to issuing equity.
- 12 month loans
- No hedging required.
- Flexibility of arrangements.
- The ongoing liability of a royalty remains only as long as the operation is in production.
- Royalties are project specific, and unlike debt are not secured against the other assets of the operator.
Advantages for the finance institution:
- Long term regular income.
- Low operational risk.
- Revenue upside due to commodity price increases and expansion of mineral resources
- Income protected from cost inflation.
- No balance sheet liability
An example of a typical royalty financing deal is the agreeement between Anglo Pacific Group and London Mining PLC in August 2011 whereby Anglo Pacific paid US$30m for a 1% GRR over London Mining's Isua Iron Ore Project . London Mining intend to use the proceeds from the sale of the royalty to finance a Bankable Feasability Study (BFS) for the project.