Investing in Gold Royalty and Streaming Stocks
Gold royalty companies offer investors exposure to gold and silver with the benefits of diversification, lower risk and a steady income stream.
Royalty companies operating in the resource sector will typically agree to provide funding for the exploration or development of a resource in exchange for a percentage of revenue from the deposit if it begins producing. Similarly, a company with a streaming model may work out an agreement with a resource company for a share of the metal produced from a deposit in exchange for an investment.
These kinds of arrangements benefit both parties. Streamers get access to the underlying commodity at a fixed price and are shielded from cost overruns and spikes in production. Further, if there is a price decrease the metals can be warehoused until the market conditions improve. In both cases, mining companies receive considerable upfront investment during the expensive construction and expansion phases, and unlike loans these investments have longer-term payouts at a fixed amount.
Let’s take a deeper look at how royalties and streaming works, their benefits and the gold and silver royalty and streaming stocks you can invest in.
How do gold and silver royalties work?
Gold and silver royalty agreements involve royalty companies agreeing to provide funding for the exploration or development of a precious metals resource in exchange for a percentage of revenue from the deposit if it begins producing metals.
The foundation for royalties dates back a few hundred years. Originally, they were payments made to the British monarchy in exchange for miners’ rights to operate gold and silver mining operations on lands held by the crown. Today, these arrangements still exist, with mining operators paying the government a share of the revenues generated from exploiting resources on public lands.
The first royalty paid to a company in the gold sector was an agreement in 1986 in which Franco-Nevada (TSX:FNV,NYSE:FNV) made a US$2 million investment into Western States Minerals’ Goldstrike small heap-leach mine in Nevada, US, for a 4 percent share of revenues collected from the mine. Western States was sold the same year to Barrick Gold (TSX:ABX,NYSE:GOLD). Barrick discovered a far larger resource at the site and the royalty has since earned Franco-Nevada more than US$1 billion.
This early example set a precedent for the industry. It saw Franco-Nevada, which was then a gold exploration company, lock itself into what became one of the largest gold mineral resources in the world at a relatively low overhead while avoiding future costs associated with the growth and maintenance of the mine.
How do gold and silver streams work?
Gold and silver streams work in a similar manner to the royalty model but returns are in the form of physical metals rather than funds. In return for investing in an asset, a gold streaming company may work out an…