1.
MINERAL
ROYALTY
STREAM
FINANCING
Aaron
Careaga
Research
Analyst
http://www.wealthmarkllc.com/research
WEALTHMARK
LLC.
1329
North
State
Street,
Suite
206
Bellingham,
WA
98225
September
2012

2. ABSTRACT
Resource
streaming,
also
known
as
volumetric
production
payments
(VPP)
or
metal
purchase
agreements,
provides
commodity
exploration
and
production
companies
the
necessary
financing
to
bring
projects
into
production.
This
has
become
an
attractive
financing
option
due
to
the
fact
that
VPP's
are
cheaper
than
equity
(no
shareholder
dilution)
and
safer
than
debt,
making
this
a
"win-­‐win"
for
both
the
mine
operator
and
financing
company.
Streaming
agreements
allow
the
mining
company
to
capitalize
on
proven
reserves
before
the
operation
becomes
productive.
These
diverse
agreements
are
crafted
to
emphasize
each
party's
strengths
and
protect
against
the
others
weaknesses.
The
underwriting
financier
enjoys
the
resource
upside
while
avoiding
the
downside
risk
associated
from
operations.
Stream
financing
allows
the
mine
operator
to
leverage
proven
reserves
to
fund
production
or
expansion,
while
avoiding
many
negative
side
effects
associated
with
traditional
financing
methods.
Aaron
Careaga
WealthMark
LLC.
1329
North
State
Street,
Suite
206
Bellingham,
WA
98225
aaron@wealthmarkllc.com
2

3.
1. Introduction
The
principal
objective
of
a
mine
streaming
finance
firm
is
to
maximize
shareholder
value.
This
is
done
by
selectively
investing
in
the
best
projects
that
will
provide
the
highest
return,
both
in
the
short
and
long-­‐term.
The
financing
company
needs
the
mine
to
become
productive
within
a
reasonable
amount
of
time
after
the
initial
investment,
otherwise
they
could
over-­‐allocate
capital
into
projects
that
might
never
succeed.
Beyond
the
initial
cash
outlay,
it
is
becoming
more
and
more
important
that
the
financing
company
actively
manage
their
mineral
interests,
as
the
mining
environment
and
commodity
market
can
greatly
fluctuate
over
a
short
period
of
time.
Active
portfolio
oversight
will
be
a
vital
element
of
the
underwriting
company's
success.
Opportunities
within
this
space
are
rapidly
expanding,
encouraging
more
traditional
finance
firms
to
start
resource
streaming
departments,
or
spin
off
entire
units
that
offer
services
targeted
at
mineral
streams.
The
evolution
of
this
specific
type
of
financing
in
the
resource
industry
is
expected
to
grow
significantly
in
the
coming
years,
likely
outpacing
the
commodity
demand
rate
of
growth.
Investors
in
the
underwriting
financier
will
benefit
from
exploration
upside,
dividend
yield,
and
the
ability
to
leverage
commodity
prices.
These
types
of
agreements
will
become
more
important
to
commodity
investors
because,
as
the
market
becomes
more
efficient,
investors
will
seek
higher
returns
on
less-­‐risky
assets.
Streaming
agreements
carry
the
potential
to
significantly
lower
the
risk
found
in
commodity
producing
investments.
The
inefficiencies
of
traditional
mine
financing
and
prevailing
disconnect
between
capital
sources
and
operations
have
led
to
many
projects
being
abandoned.
This
places
both
parties
in
an
advantageous
position,
as
the
auspicious
terms
in
mineral
resource
streaming
agreements
far
outshine
traditional
financing
options.
Existing
shareholders
and
new
investors
of
the
mining
operation
will
benefit
from
this
type
of
financing
due
to
lower
exposure
to
capital,
operating,
and
environmental
costs.
Holding
the
ability
to
finance
operations
on
a
project-­‐by-­‐project
basis
allows
the
firm
to
smooth
the
waves
of
volatility
associated
with
this
type
of
operation
and
financing
agreement.
This
puts
the
mining
company,
and
its
investors,
in
a
better
position
to
outride
industry
downturns.
As
the
economic
and
political
significance
of
commodities
continues
to
increase,
so
will
the
need
of
these
producers
to
receive
the
financing
necessary
to
bring
products
to
market.
Royalty
payment
streams
offer
an
innovative
and
relatively
lower
risk
vehicle
for
investors
to
utilize
by
matching
the
capital
supply
with
industry
demand;
capturing
commodity
spreads
and
market
fluctuations
without
the
risk
of
directly
operating
the
mine.
3

4. 2. Overview
The
concept
of
royalty
payments
on
non-­‐renewable
resources
has
been
a
common
financing
tool
in
the
Oil
&
Gas
industry
for
many
years.
The
ability
to
monetize
reserves
while
they
are
still
in
the
ground
has
proven
to
be
very
rewarding
to
both
sides
of
the
transaction,
which
ultimately
inspired
the
application
of
royalty
payments
and
streaming
to
the
mining
industry.
HISTORY:
Early
pioneers
to
apply
the
royalty
payment
methodology
in
the
mining
industry
are
Seymour
Schulich
and
Pierre
Lassonde,
godfathers
in
the
resource
mining
space.
Schulich
and
Lassonde
met
at
the
Vancouver
based
firm
Buetel,
Goodman,
and
Co.
and
joined
forces,
later
starting
the
Franco-­‐Nevada
Mining
Corporation
in
1982.
The
firm
was
established
with
the
intention
of
exploring
and
producing
gold
throughout
Nevada
but,
after
a
couple
mediocre
attempts,
Schulich
and
Lassonde
transitioned
Franco-­‐Nevada
into
the
world's
first
gold
royalty
company.
Franco-­‐Nevada
applied
Schulich's
knowledge
of
the
royalty
space,
acquiring
their
first
royalty
stream
in
1986
for
a
cost
of
$2
million
dollars,
giving
the
company
a
4%
annual,
and
a
5%
net
profit
interest,
royalty
on
that
streams
production.
Lassonde
told
a
reporter
that,
"To
our
surprise,
we
couldn't
identify
a
single
company
in
the
business
capitalizing
on
hard-­‐rock
royalties.
That
was
our
cue.
That
was
the
real
start
of
Franco-­‐Nevada"
(Northern
Miner).
As
of
2002,
this
stream
alone
was
generating
$30
million
annually.
Throughout
this
same
period,
Franco-­‐Nevada
grew
from
an
initial
market
cap
of
$2.3
million
to
$3
billion,
prior
to
merging.
The
majority
of
resources
in
countries
across
the
globe
are
owned
and
controlled
by
the
government,
limiting
the
opportunity
for
future
growth
in
both
the
mining
and
mineral
resource
streaming
industry.
The
paradox
of
plenty,
also
known
as
the
oil
curse,
is
another
factor
considered
to
be
a
burden
on
countries
with
poorly
managed
governments
who
exploit
the
value
from
natural
resource
reserves
to
often
further
their
own
political
interests
(Economist).
The
resulting
discriminatory
regimes
create
an
operating
environment
that
is
not
cost-­‐effective
to
enter.
The
political
instability
and
corruption
that
is
often
associated
with
such
countries
significantly
increases
the
overall
risk
and
costs
related
to
mining.
BENEFITS:
Industry
participant,
the
Gold
Royal
Corp,
cites
five
major
benefits
from
stream
financing
that
improve
the
operations
for
both
parties
involved
(Kalt).
First,
the
ability
for
both
firms
to
mutually
share
the
risk
creates
an
agreement
that
would
normally
not
provide
as
much
of
a
diversification
opportunity.
By
spreading
risk
across
multiple
levels,
and
between
two
independent
firms,
will
allow
both
parties
to
attain
terms
that
might
not
otherwise
be
possible.
Second,
less
shareholder
dilution
allows
the
mine
operator
to
maintain
its
level
of
ownership
without
diluting
current
shareholders
value.
This
is
probably
the
greatest
4

5. benefit
gained
from
the
mine
operator's
perspective
because
it
allows
the
mine
operator
to
maintain
ownership
rights.
Whether
through
a
privately
held
or
publicly
traded
company,
conserving
ownership
rights
allows
the
firm
to
operate
more
flexibly
and
creates
more
opportunity
for
future
growth
and
acquisitions.
Third,
royalty
streaming
allows
the
operating
company
to
finance
projects
on
a
location-­‐by-­‐
location
basis.
This
allows
the
firm
to
continue
exploring
and
producing
additional
streams
and
mine
multiple
commodities.
The
ability,
as
a
mine
operator,
to
explore
and
produce
additional
resources
can
minimize
risk
associated
with
the
long-­‐term
viability
of
a
less
diversified
portfolio.
Fourth,
mine
royalty
streaming
holds
accretive
value.
As
the
mine
grows
into
a
productive
state,
the
operator
receives
more
efficiently
priced
capital
and
the
ability
to
produce
sooner
than
otherwise
might
be
possible.
This
benefits
the
underwriting
financier
because
the
sooner
the
mine
produces
resources,
the
quicker
investors
will
receive
a
return.
TYPES
OF
AGREEMENTS:
There
are
currently
three
main
types
of
royalty
stream
financing
agreements,
which
are
either
based
upon
the
production
amount,
resource
market
value,
or
the
operations
net
profit.
Net
smelter
return
(NSR)
agreements,
or
royalty
streams
based
on
the
amount
produced,
appeal
to
mineral
rights
owners
because
they
are
able
to
capture
changes
in
production
as
the
stream
generates
additional
resources.
The
second
form
of
agreement
is
a
royalty
stream
based
on
the
value
of
production.
These
contracts
are
highly
correlated
to
market
fluctuations
as
the
value
of
production
changes
with
commodity
price
fluctuations.
The
third
type
of
agreement
is
a
net
profit
interest
(NPI)
and
is
a
contract
based
upon
profit.
NPI’s
are
the
most
popular
type
of
stream
financing
agreements
and
appeal
to
many
investors
because
it
allows
them
to
leverage
changes
in
commodity
prices
while
limiting
the
mines
financial
and
economic
exposure.
These
are
also
considered
to
be
the
most
profitable
and
highest
risk
contracts
in
the
resource
streaming
space
(Callinan).
Depending
on
the
current
phase
of
the
production,
royalties
are
categorized
as
key
producing
assets,
advanced
stage
assets,
or
exploration
assets.
The
intention
behind
structuring
operations
in
this
way
is
that
management
at
both
the
operating
mine
and
investing
firm
can
easily
track
the
highest
and
best
use
of
funds.
As
projects
develop
into
retirement,
management
is
able
to
efficiently
track
and
refocus
attention
on
the
most
profitable
projects.
WHY
SELL
A
ROYALTY
STREAM?
Mines
often
sell
royalty
streams
to
fund
production
or
expansion
by
capitalizing
on
proven
resources,
providing
a
significant
return
to
shareholders.
As
a
mine
grows,
so
does
the
operator’s
need
to
minimize
risk.
This
type
of
financing
allows
operations
to
expand
while
diversifying
the
financing
risk
derived
from
traditional
methods,
freeing
up
the
mine's
capital
reserves
for
future
investment
prospects
that
might
offer
a
higher
return.
5

6. Managers
need
to
be
vigilantly
aware
of
the
use
of
capital
generated
from
stream
financing,
as
industry
participants
warn
that
investing
this
cash
flow
in
non-­‐core
activities,
like
general
and
administrative
costs,
greatly
lowers
future
return
(Kalt,
2).
Rather,
it
is
a
better
use
of
funds
to
invest
in
future
prospects
that
can
add
greater
value
and
generate
future
revenue.
Operating
managers
should
classify
royalty
streams
by
their
current
state
of
production
and
seek
resource
stream
financing
for
prospective
projects
to
free-­‐up
capital
and
provide
the
firm
with
consistent
growth
opportunities.
OPTIMAL
AGREEMENT:
The
optimal
stream-­‐underwriting
model
extends
traditional
financing
by
including
methods
learned
from
the
Oil
and
Gas
industry
to
expand
possible
investment
opportunities.
The
process
is
initiated
with
an
underwriting
financier
being
approached
(or
reverse
contact)
by
a
mining
exploration
and
production
company
seeking
capital.
The
mine
operator,
if
inclined
to
the
terms,
agrees
to
the
stream
agreement
and
uses
the
capital
to
fund
operations
on
the
basis
of
future
production.
Stream
financing
companies
must
maintain
a
vigilant
awareness
of
the
mine’s
rapidly
changing
operating
environment
and
adequately
research
management’s
background
to
achieve
premium
returns
on
prospective
stream
investments.
If
correctly
arranged,
the
streaming
agreement
should
allow
the
financier
to
purchase
the
commodity
at,
or
beneath,
the
lowest
cost
producer
in
the
market.
This
allows
the
investing
firm,
and
its
shareholders,
to
profit
from
the
spread
between
the
spot
and
forward
rate.
VALUATION:
As
with
many
commodity
related
assets,
it
is
increasingly
difficult
to
value
corresponding
financial
vehicles
as
the
market
environment
rapidly
fluctuates.
The
value
assigned
to
royalty
streaming
agreements
is
derived
from
the
mine's
total
production,
contract
royalty
rate,
and
remaining
life
of
the
mine.
Due
to
many
subjective
challenges
arising
from
the
valuation
of
individual
royalty
streaming
firms
operating
in
this
space,
I
will
discuss
the
basic
process
and
potential
risks
that
investors
might
face.
The
unique
opportunity
created
by
using
royalty
stream
financing
provides
investors
with
the
rare
chance
to
achieve
commodity
and
mining
exposure
while
remaining
significantly
more
insulated
(relative
to
traditional
vehicles)
against
direct
industry
volatility.
But,
the
nature
of
the
business
creates
many
challenges
when
comparing
financial
metrics
of
royalty
streaming
firms
with
other
mine
companies.
To
value
an
individual
firm,
or
even
a
specific
royalty
stream,
investors
typically
use
a
net
present
value
calculation,
or
by
discounting
all
future
cash
flows
back
to
the
present.
Critical
assumptions
must
be
made
as
to
the
proper
discount
rate,
time
period,
and
overall
likelihood
of
achieving
forecasted
revenues.
Many
assumptions,
based
on
everything
from
commodity
prices
to
the
cost
of
capital,
used
in
net
present
value
calculation
quickly
change
with
market
conditions.
If
the
prospective
royalty-­‐streaming
firm
is
publicly
traded,
investors
can
alternatively
utilize
its
market
determined
share
price
as
a
more
dynamic
valuation
method.
Stock
6

7. markets
are
not
free
from
abnormalities
that
might
negatively
influence
price
performance
but
the
incomparable
dissemination
of
information
results
in
a
more
accurate
valuation.
Most
traditional
valuation
methods
fail
to
capture
the
true
value
of
royalty
streaming
firms.
Because
the
nature
of
industry
strategy,
streaming
companies
not
directly
operating
underlying
mine
projects,
investors
must
be
aware
that
financial
metrics
of
royalty
firms
will
often
show
wide
variations
depending
on
the
stage
of
production.
Investors
must
take
into
account
the
company’s
opportunity
for
future
prospects
and
a
slow
rate
of
initial
company
growth
as
quality
streams
are
acquired.
To
capture
the
highest
return,
investors
must
take
into
account
not
only
future
prospects
but
also
management’s
ability
to
navigate
potential
challenges.
Agreement
terms
are
often
unique
to
specific
projects,
increasing
the
total
number
of
potential
options
available
for
financiers
to
extract
greater
value
from
market
fluctuations.
Options
to
change
the
royalty
rate,
or
expand
production,
create
a
wide
array
of
potential
investment
catalyst
and
significantly
increase
the
challenge
of
valuing
specific
streams,
let
alone
entire
firm
portfolios.
Source:
Google
Finance
8/29/12
Using
current
market
data
as
the
main
metric
for
comparison,
Silver
Wheaton
is
the
largest
primary
operating
firm
in
the
royalty
streaming
space
with
a
market
cap
of
$12.24
billion
as
of
August
29,
2012.
The
smallest
primary
competitor
is
Gold
Royalties
Corp,
with
a
market
cap
of
$15.35
million
as
of
August
29,
2012.
As
witnessed
from
rapid
growth
in
the
number
of
industry
participants,
the
application
of
royalty
streaming
as
a
financing
tool
in
the
mining
industry
has
significantly
evolved
since
Schulich
and
Lassonde’s
initial
use.
7

8. 3. Current
Environment
The
current
market
environment
has
revealed
a
substantial
challenge
in
the
mining
and
commodities
industry,
which
is
an
inability
to
efficiently
raise
capital.
Exploration
and
production
(E&P)
companies
are
restricted
from
traditional
financing
avenues
because
of
inadequate
cash
flow
and
the
high
degree
of
risk
associated
with
commodity
ventures.
The
possible
solution
to
this
problem
lies
with
royalty
stream
financing
companies.
These
firms
provide
the
options
necessary
to
bring
mining
and
precious
metal
projects
to
a
profitable
state
by
financing
low
cost
operations
and
highly
skilled
management
teams.
In
compensation,
the
streaming
company
typically
receives
a
guaranteed
principal
repayment
and
a
royalty
to
purchase
the
future
production
stream
of
the
mine
at
a
predetermined
price,
creating
significant
financial
upside
with
minimal
operating
risk
to
investors.
Mine
royalty
streaming
is
the
direct
result
of
Schulich
and
Lassonde’s
efforts
pioneering
the
space
and
creating
Franco-­‐Nevada
in
the
mid
1980’s.
They
overcame
initial
setbacks,
changed
strategic
direction,
and
then
heavily
reinvested
back
into
the
firm.
The
stream-­‐financing
model
allowed
Franco-­‐Nevada
to
rapidly
expand
through
use
of
its
consistent
stream
of
free
cash
flow,
a
benefit
that
is
difficult
to
achieve
with
traditional
financing.
In
April
of
2002,
Franco-­‐Nevada
went
on
to
sell
it’s
only
mine
(Midas,
aka
Goldstrike)
to
Normandy
Mining,
in
exchange
for
a
5%
lifetime
royalty
and
20%
of
Normandy's
shares.
After
continuing
to
acquire
additional
streams,
Schulich
and
Lassonde
instigated
a
bidding
war
between
Newmont
Mining
and
AngloGold.
Newmont
won
the
battle
and
ultimately
bought
Normandy,
in
addition
to
merging
with
Franco-­‐Nevada,
creating
the
world's
largest
gold
producer.
Newmont
held
the
original
Franco-­‐Nevada
Mining
Corporation
portfolio
until
it
spun
off
in
2006,
resulting
in
an
even
larger,
gold
focused,
royalty
and
streaming
company
under
the
title
of
the
Franco-­‐Nevada
Corporation.
The
2007
initial
public
offering
of
the
new
Franco-­‐Nevada
raised
$1.1
billion;
the
largest
mine
offering
and
second
largest
Canadian
IPO
of
the
decade.
Over
this
short
time
span,
the
industry
has
rapidly
grown
into
the
environment
we
have
today.
Operating
in
the
mineral
resource
industry
poses
significant
risks
due
to
the
nature
of
the
business,
but
Franco-­‐Nevada
COO
Geoff
Waterman
attributes
much
of
the
models
success
to
the
margin
of
safety
that
royalties
provide.
He
explains
that,
“as
commodity
prices
move
down,
you
get
very
little
change
in
your
royalty
streams…
the
margins
we
have
in
our
business
are
about
85
percent,
which
is
double
the
amount
that
a
typical
business
would
have”
(Canadian
Business
Journal).
With
global
market
volatility
remaining
elevated
and
no
immediate
solution
to
numerous
population
growth
related
issues,
demand
for
commodities
is
likely
to
continue
its
exponential
growth.
EMERGING
MARKETS:
Countries
that
are
considered
to
be
emerging
markets,
or
the
next
“up-­‐and-­‐coming”
economic
leaders,
hold
a
dominant
role
influencing
the
current
market
environment.
Investments
in
nations
such
as
the
BRICs
(Brazil,
Russia,
India,
and
China)
should
be
considered
as
an
integral
element
of
portfolio
strategies.
Although
the
majority
lack
the
necessary
government
8

9. regulation
and
infrastructure
to
support
current
demographics,
economic
prosperity
derived
from
these
nations
is
already
noticed
as
a
major
influence
in
the
global
economy.
Capital
markets
greatly
affect
the
future
growth
of
countries
that
lack
the
proper
government
structure
to
otherwise
fund.
Developing
countries
need
the
proper
infrastructure
to
support
local
populations
and
future
investment,
without
which,
the
economic
climate
will
otherwise
remain
extremely
unstable.
Because
resource
location
plays
a
dominant
role
throughout
the
acquisition
and
production
phases
of
royalty
streaming,
maintaining
an
awareness
of
the
current
operating
atmosphere
is
highly
advisable.
As
a
leading
source
of
research
on
emerging
markets,
Goldman
Sachs
notes:
“The
vast
majority
of
financing
continues
to
come
from
public
sources,
with
the
private
sector
bearing
only
20-­25%
of
the
cost.
But
as
public
finances
are
more
strained
since
the
crisis,
the
BRICs
will
have
to
rely
more
heavily
on
private
infrastructure
funding.
To
access
this,
the
BRICs
have
to
continue
to
improve
the
business
environment
and
expand
financial
intermediation
in
local
markets”
(Burgi,
Carlson,
Wilson).
Prospective
investors
to
royalty
streaming
companies
should
be
aware
of
the
current
environment
and
underlying
risks
associated
with
local
financial
market
intermediation.
The
charts
below
display
both
the
number
of
infrastructure
projects
and
private
investments
as
a
percent
of
GDP
throughout
the
BRICs.
As
a
relative
basis
of
growth
comparison,
the
number
of
infrastructure
projects
funded
through
private
parties
appears
to
continue
along
its
increasing
trend.
Source:
Burgi,
Carlson,
Wilson
South
America
is
another
region
that
plays
a
significant
role
in
influencing
future
mining
projects.
The
economies
of
these
countries
are
quickly
adapting
to
increases
in
population
growth
and,
as
a
major
driver,
even
marginal
increases
in
commodity
demand
is
expected
to
attract
increased
investment
activity
and
royalty
stream
financing
demand.
The
opportunity
to
achieve
higher
returns
on
investments
in
economically
unstable
regions
should
be
carefully
weighed
against
the
increased
risks.
Resource
location
plays
a
dominant
role
throughout
the
acquisition
and
production
phases
of
royalty
financing,
as
the
majority
of
“new”
streams
are
discovered
in
underdeveloped
areas.
9

10.
This
greatly
increases
the
risk
associated
from
stream
underwriting
because
the
often-­‐
inconsistent
political
environment
provides
little
regulatory
protection.
As
the
demand
for
commodities
increases
with
population
growth,
transitioning
economies
will
continue
to
push
exploration
efforts
farther
into
undeveloped
markets.
RISK
FACTORS:
There
are
many
risk
factors
associated
with
royalty
streaming,
ranging
from
counterparty
default
to
government
corruption.
As
discussed
above,
the
future
of
the
business
is
determined
by
the
quality
of
streams
in
the
portfolio
and
the
firm’s
ability
to
acquire
new
interests
or
expand
current
projects.
Due
to
the
nature
of
mining,
and
evolution
of
the
royalty
financing
space,
underwriters
are
often
faced
with
limited
information
on
underlying
projects
or
companies
and
often
relinquish
day-­‐to-­‐day
managing
control
of
the
project
in
the
terms
of
agreement.
This
limited
control
increases
the
firms
portfolio
risk
because
of
natural
disconnects
of
information
between
companies,
each
operating
on
distinct
motives.
It
is
critical
for
royalty
financiers
to
actively
manage
stream
portfolios
so
the
firm
is
not
blindsided
by
potentially
foreseeable
risks.
A
primary
concern
of
most
financiers
is
counterparty
default.
Royalty
agreements
are
crafted
in
a
way
to
limit
default
risk
by
backing
the
agreement
with
the
mine’s
resources,
equipment,
or
other
assets
as
collateral.
With
collateral,
the
financing
companies
seem
protected
against
counterparty
default.
But,
as
witnessed
through
the
2008
recession,
it
is
likely
that
any
defaults
will
end
up
costing
the
streaming
company
more
than
originally
estimated.
As
an
investor,
it
is
important
to
analyze
the
firm’s
robustness
when
investing
in
royalty
financiers
so
that
unforeseen
costs
associated
with
defaults
are
not
a
threat
to
long-­‐term
viability.
Litigation
costs
are
another
major
risk
factor
threatening
royalty
financiers.
Mining
creates
many
environmental
and
socio-­‐economic
problems
that
often
face
heated
opposition,
leaving
royalty-­‐financing
firms
open
to
liability.
In
order
to
protect
against
litigation
costs,
these
companies
must
craft
agreements
in
a
way
that
release
all
operating
liability
to
the
mine
controller.
Supply
chain
threats
also
continue
to
be
a
major
risk
in
the
mining
space,
both
at
the
financing
and
operating
levels.
Major
threats
to
supply
are
risks
derived
from
location
or
nature
of
the
specific
mineral
resource
and
include,
but
are
not
limited
to,
sovereign
risk
and
resource
scarcity.
A
current
example
of
sovereign
risk
is
witnessed
through
the
Euro-­‐zone,
specifically
across
the
PIIGS:
Portugal,
Italy,
Ireland,
Greece,
and
Spain.
Although
the
concentration
of
mineral
resources
is
low
in
this
region,
the
risk
of
governments
not
following
through
with
financial
obligations
poses
a
significant
threat
with
implications
ranging
from
the
terms
of
capital
to
daily
operations.
Commodity
market
cycles
also
pose
a
threat
to
a
royalty
streaming
firm’s
profitability,
due
to
the
fluctuations
in
spread
between
the
royalty
and
spot
rates.
To
minimize
this
risk,
firms
can
form
terms
that
either
base
the
royalty
on
a
less
highly
correlated
factor
of
production
(NSR)
or
arrange
the
terms
of
the
royalty
rate
to
track
current
market
conditions.
Also,
firms
can
hedge
resource
production
to
leverage
returns
or
minimize
the
downside
risk
associated
with
negative
shocks.
A
drawback
of
hedging
commodities
is
limiting
potential
return.
These
10

11. suggestions
should
be
considered
as
possible
improvements
to
the
royalty-­‐financing
model
and
are
discussed
in
greater
depth
in
the
perspective
section
below.
STRATEGY:
As
the
royalty
financing
industry
becomes
increasingly
competitive,
the
evolution
of
firm
strategy
and
management
principles
prove
to
be
significantly
important
to
success
going
forward.
To
return
a
profit
to
shareholders,
management
must
seek
out
and
only
invest
in
the
highest
quality
projects
attainable,
in
terms
of
both
the
operating
company
and
specific
stream
resource.
The
firm
should
then
diversify
portfolio
holdings
amongst
a
variety
of
quality
assets
to
mitigate
risk
factors
discussed
above.
There
are
four
overriding
principles
critical
to
the
implementation
of
a
successful
strategy.
Many
firms
have
suffered
losses
by
“blindly”
entering
into
terms
that,
due
to
a
specific
lack
of
expertise,
leave
the
financier
unknowingly
vulnerable.
The
first
goal
of
the
company’s
strategy
should
be
to
acquire
undervalued
projects
by
specifically
investing
in
streams
where
the
firm
and
management
can
add
value.
Doing
so
will
limit
the
potential
for
losses
derived
from
a
lack
of
expertise.
As
discussed
previously,
another
critical
element
to
a
successful
strategy
includes
diversifying
the
portfolio
of
streams
by
operating
in
a
global
scope.
Holding
a
variety
of
projects
limits
the
firm’s
potential
losses
derived
from
regional
environmental,
political,
and
economic
risks.
Another
key
element
to
a
successful
strategy
is
maintaining
a
high
level
of
liquidity.
This
allows
the
firms
to
not
only
capitalize
on
opportunities
as
they
present
themselves
but
also
to
cushion
against
unforeseen
losses.
In
addition,
a
lean
operating
structure
will
prove
beneficial
on
many
levels
of
the
company.
This
will
allow
management
to
focus
only
on
value-­‐added
activities
and
cut
waste
as
the
company
evolves.
Firms
that
follow
these
principles
in
strategy
when
entering
into
streaming
agreements
position
themselves
to
achieve
higher
returns,
minimize
downside
risk,
capitalize
on
opportunities,
and
cut
waste;
allowing
for
continuous
improvement
in
operating
efficiency.
A
challenge
faced
by
many
royalty
financiers
when
considering
prospective
investments
is
what
scale
to
use
in
valuing
the
quality
of
streams.
Inconsistencies
across
term
agreements
and
the
wide
variety
of
characteristics
unique
to
each
project
challenge
a
common
scalability
of
quality.
The
mining
industry,
specifically
royalty-­‐streaming
space,
needs
to
create
a
set
of
standards
to
rate
the
overall
investment
caliber
to
lessen
both
the
firm
and
individual
investor
subjectivity.
If
a
quality
rating
was
utilized,
similar
to
the
credit
rating
in
the
bond
market,
royalty
streaming
firms
and
individual
streams
would
be
much
more
comparable.
MANAGEMENT:
The
growth
of
royalty
financing
firms
has
created
unique
opportunities
for
its
management
and
employees.
As
competition
amongst
firms
increases,
it
is
becoming
consistently
more
important
for
participants
to
have
adequate
capital
on
hand
to
capture
high
quality
projects
as
they
present
themselves.
If
management
overextends
the
firm’s
resources
or
ability
to
manage
its
current
portfolio,
the
company
will
be
poorly
positioned
for
future
growth.
11

12. This
is
why
a
large
majority
of
firm
resources
are
directed
towards
researching
prospective
streams
and
actively
managing
the
current
portfolio.
Franco-­‐Nevada
COO
Geoff
Waterman
conveys
that,
“We’re
always
looking
for
new
acquisitions.
One
of
the
basic
premises
in
the
royalty
model
and
in
our
business
philosophy
in
general
is
to
make
sure
that
we’re
well
funded
when
others
aren’t…
that’s
when
you
get
the
best
opportunities”
(Canadian
Business
Journal).
Successful
companies,
regardless
of
the
industry,
share
the
common
tie
of
being
prepared
and
capitalizing
on
opportunities
as
they
are
found.
Franco-­‐Nevada
continues
to
successfully
execute
this
strategy
as
a
dominant
player
in
the
royalty
streaming
space.
ACCOUNTING
STANDARDS:
The
range
of
accounting
standards
in
the
royalty
streaming
industry
varies
from
country
to
country,
creating
an
environment
where
it
is
extremely
hard
to
value
both
royalty
firms
and
individual
streams.
A
convergence
to
International
Financial
Reporting
Standards
(IFRS)
is
taking
place
but
the
timing
of
when
the
transition
will
occur
is
unlikely
in
the
short
term.
The
complex
differences
between
IFRS
and
other
standards,
like
the
Generally
Accepted
Accounting
Principals
(GAAP),
have
greatly
slowed
the
process.
In
the
United
States,
under
GAAP,
mineral
financiers
state
the
royalty
at
cost,
net
of
any
accumulated
amortization
or
impairment.
The
asset
is
then
tested
for
recoverability
when
a
change
in
operations
indicates
the
carrying
amounts
are
unrecoverable.
If
the
amount
is
deemed
unrecoverable,
the
firm
then
writes
the
asset
down
to
fair
value.
GOVERNMENT
ROYALTY
TAXES:
Government
discrimination
in
the
treatment
of
royalty
taxes
is
common
throughout
the
mining
industry,
regardless
of
resource
type.
The
major
threats
from
this
to
royalty
streaming
companies
are
the
indirect
costs
of
discriminatory
government
regulation
being
passed
along
to,
or
even
preventing,
future
mine
operations.
A
current
example
of
this
is
the
Chinese
government’s
use
of
subsidies
to
regulate
mineral
production
within
a
certain
range,
in
exchange
for
preferential
tax
treatment.
Three
of
the
most
common
royalty
taxes
utilized
by
governments
are
ad
valorem,
unit
based,
or
profit
based;
notice
the
categorical
similarity
with
the
types
of
royalty
stream
agreements.
Ad
valorem
is
a
royalty
tax
based
on
the
value
of
production.
This
used
to
be
the
most
popular
tax
utilized
by
government
but
a
transition
to
profit
based
taxes
has
taken
place
due
to
that
fact
that
value
based
taxes
fail
to
fully
capture
what
the
government
considers
to
be
either
firms
taxable
activity
(Otto,
Andrews,
Cawood,
Doggett,
Gui,
Stermole
F.,
Stermole
J.,
Tilton).
In
recent
years,
a
major
point
of
contention
has
been
Australia’s
Resource
Super
Profits
Tax.
The
Australian
government
is
increasing
the
tax
on
profits
that
exceed
a
certain
bound,
$75m
profit
per
year
for
iron
ore
and
coal
producers,
to
retain
more
of
the
value
mined
within
the
country’s
borders.
With
mining
a
critically
important
industry
in
Australia’s
economy,
the
government
should
be
careful
not
to
drive
producers
away
with
increased
costs.
As
the
demand
for
resources
increases
and
government
deficits
bloat,
it
would
not
be
surprising
to
see
a
similar
“super-­‐profits”
tax
imposed
throughout
other
developed
economies.
12

13. This
tax
also
poses
a
threat
to
future
exploration
activity
in
Australia.
Due
to
increased
costs
of
production
from
the
tax,
mine
operators
will
likely
be
pushed
into
new
markets
in
search
of
lower
costs
of
production
and
explorative
growth
prospects.
As
this
demand
for
new
projects
in
less
developed
regions
is
pushed
higher,
so
will
the
demand
for
royalty
stream
financing
due
to
its
efficiency
over
traditional
financing
routes.
13

14.
4. Competition
Competition
amongst
firms
capable
of
providing
royalty
streaming
to
mineral
resource
projects
has
drastically
increased
in
recent
years.
From
the
creation
of
Franco-­‐Nevada
in
1982
until
the
early
2000’s
a
few
large-­‐scale
underwriters
have
dominated
the
space.
Variations
in
the
business
model,
from
target
resource
to
stream
terms,
have
taken
place
as
the
industry
has
quickly
grown.
For
discussion
purposes,
mineral
stream
financiers
will
be
categorized
by
there
focus
of
operations.
Primary
firms
are
characterized
by
their
sole
operating
purpose
of
acquiring
streams.
Secondary
firms
operate
in
many
spaces
with
royalty
stream
financing
only
a
small
portion
of
overall
company
focus.
The
final
category
of
firms
is
categorized
as
consultants,
a
separate
division
focused
on
advising
or
raising
additional
private
investment
for
resource
mining
firms
related
to
royalty
streaming.
Graphed
below
is
the
overall
market
performance
of
the
eight
primary
competing
royalty-­‐
streaming
firms,
from
January
2000
to
September
2012.
The
portfolio
graphed
includes
Anglo
Pacific
(APY),
Bullion
Monarch
Mining
(BULM),
Callinan
Royalties
Corp.
(CAA),
Franco-­‐Nevada
(FNV),
Gold
Royalties
Corp
(GRO),
Royal
Gold
(RGLD),
Sandstorm
Gold
(SAND)
and
Metals
&
Energy
(SND),
and
Silver
Wheaton
(SLW).
Source:
Google
Finance
8/29/12
Although
not
all
firms
existed
when
the
graph
initiates,
you
can
see
the
overall
industry
has
rapidly
grown
from
its
initial
roots.
Mine
operator
and
investor
interest
in
royalty
streaming
firms
over
the
past
decade
has
proven,
and
will
likely
continue,
to
remain
a
major
catalyst
driving
industry
growth.
As
more
junior
exploration
and
production
firms
learn
of
such
equitable
financing
agreements,
and
investors
see
the
return
opportunities
and
niche
industry
performance,
royalty
stream
financing
will
likely
become
a
common
and
integral
tool
utilized
by
most
operators,
in
need
of
capital,
in
the
mineral
extraction
space.
14

15. Below
is
a
peer
comparison
of
major
competitors
in
the
royalty
streaming
space
using
the
enterprise
value
to
cash
flow
metric.
This
takes
into
account
the
company’s
capital
structure,
rather
than
just
equity
using
a
P/E
or
price
to
cash
flow
ratio,
and
provides
a
more
comparable
representation
of
the
industry.
All
of
the
firms
are
fairly
similar
with
an
average
EV/CF
in
the
14
to
16
range,
but
Sandstorm
Metals
is
the
outlier
due
to
the
current
phase
of
production
across
its
portfolio
streams.
Source:
Sandstorm
M&E
The
following
section
is
an
overview
of
the
primary
firms
competing
in
the
royalty
stream
financing
space
with
an
additional
summary
of
secondary
and
consulting
firms
in
the
appendix.
15

16. Primary
Firms
Sandstorm:
The
Sandstorm
Company
operates
under
two
distinct
streaming
divisions,
Sandstorm
Metals
and
Energy
(SND)
and
Sandstorm
Gold
(SAND).
Each
business
segment
operates
independently
but
is
led
by
President
and
CEO
Nolan
Watson.
Sandstorm
provides
junior
mining
and
energy
exploration
and
production
companies,
in
both
diversified
metals
&
energy
and
gold
commodities,
the
funding
necessary
to
transition
projects
into
a
productive
state.
In
compensation,
the
firm
requires
a
guaranteed
principal
repayment
(~5
yrs)
in
addition
to
a
lifetime
royalty
on
the
production
stream.
This
allows
Sandstorm
to
buy
the
commodity
at
a
fixed
price
at
or
below
the
lowest
cost
producer
in
the
market.
Sandstorm
operates
in
a
favorable
business
structure
by
incorporating
in
Barbados,
leading
to
minimal
income
taxes
and
higher
revenues
generated
relative
to
tax-­‐abiding
firms.
This
poses
a
risk
to
future
operations
if
government
officials,
in
operating
regions
of
the
firm,
seek
recovery
of
unpaid
taxes.
Sandstorm
has
reduced
the
risk
associated
with
mining
E&P
companies
by
requiring
a
minimum
cash
flow
guarantee
that
is
typically
backed
by
a
senior
secured
lien.
This
guarantee
has
helped
the
firm
minimize
potential
losses
by
liquidating
the
borrower’s
assets
in
the
event
of
a
write
off.
Sandstorm
M&E
has
further
minimized
risk
by
diversifying
its
holdings
amongst
coal
(thermal
and
met),
oil,
natural
gas,
and
copper.
Sandstorm
Gold
currently
holds
seven
streams
including
the
Aurizona
Gold,
Black
Fox,
Santa
Elena,
Bachelor
Lake,
Ming,
Mt.
Hamilton,
Coringa
and
Cuiu
Cuiu,
Bracemac
McLeod,
and
Summit
Mine
projects.
Sandstorm
Metals
&
Energy
holds
a
portfolio
of
six
streams
including
Bracemac
McLeod
(Copper),
Gordon
Creek
(Natural
Gas),
Rex
No.
1
&
Rosa
(Coal),
and
Two
Creek
&
Strathmore
(Oil).
Nolan
Watson,
CEO
of
Sandstorm
Metals
&
Energy
and
Sandstorm
Gold,
has
provided
consistent
returns
and
opportunities
for
growth
through
his
influence
in
shaping
the
royalty
streaming
space.
Watson
started
his
career
with
Deloitte
and
Touche,
performing
business
valuations
and
merger
and
acquisition
support.
In
2004,
he
transitioned
into
a
controller
role,
becoming
the
first
employee
of
Silver
Wheaton
under
the
guidance
of
Ian
Tefler
and
eventually
the
youngest
CFO
to
ever
be
on
a
NYSE-­‐listed
firm.
During
his
tenure
as
CFO,
Watson
helped
grow
Silver
Wheaton
from
$200
million
to
a
valuation
of
$3
billion
in
2008.
Key
management
includes
Nolan
Watson,
President,
CEO,
&
Director,
David
Awram,
Executive
VP
&
Director,
and
Erfan
Kazemi,
CFO.
The
firm
is
based
in
Vancouver,
BC.
www.sandstormmetalsandenergy.com
www.sandstormgold.com
16

17.
Silver
Wheaton
(SLW):
Silver
Wheaton
is
the
world's
largest
silver
focused
streaming
company,
with
17
operating
mines
and
4
projects
in
development
stage.
Silver
Wheaton's
profits
are
subject
to
minimal
income
taxes
due
to
its
incorporation
in
Barbados
and
the
Cayman
Islands.
This
poses
a
risk
to
future
operations
if
government
agencies
file
to
recover
back
taxes,
potentially
threatening
the
firm’s
competitiveness
in
the
royalty
streaming
space.
The
company
holds
notable
streams
in
Barrick’s
Pascua-­‐Lama,
Hudson
Bay’s
flagship
777
mine,
and
the
Constancia
project.
The
firm
is
able
to
provide
decent
shareholder
returns
by
maintaining
a
low
level
of
fixed
costs
at
$4
per
ounce
of
silver,
resulting
in
a
44%
gain
in
stock
price
over
the
past
two
years
(August
2010-­‐2012).
Silver
Wheaton
has
played
a
pivotal
role
in
developing
royalty
streaming
due
to
its
silver
specific
focus
and
innovative
business
model.
The
firm
extended
the
traditional
royalty
model
into
a
form
designed
to
cushion
volatility
through
a
net
of
current
profit
and
fixed
cost
agreement.
Former
Silver
Wheaton
employee
Nolan
Watson
left
the
firm
and
applied
similar
principles
in
starting
Sandstorm.
www.silverwheaton.com
Franco-­‐Nevada
(FNV):
Franco
Nevada
is
the
oldest
royalty
stream
financing
firm.
The
company’s
founders,
Seymour
Schulich
and
Pierre
Lassonde,
are
considered
godfathers
in
the
resource
mining
space.
The
firm
was
established
with
the
intent
of
exploring
and
producing
gold
throughout
Nevada
but
after
a
couple
mediocre
attempts,
Schulich
and
Lassonde
transitioned
Franco-­‐Nevada
into
the
world's
first
gold
royalty
company.
The
firm’s
stock
provides
a
better
alternative
than
traditional
investment
prospects,
a
more
efficient
vehicle
in
gaining
exposure
to
the
underlying
market.
Franco-­‐Nevada
holds
a
portfolio
of
royalty
assets
on
gold,
precious
metals,
other
minerals,
and
oil
&
gas
streams
(see
table
below).
The
firm
operates
with
a
strategy
of
acquiring
high
quality
and
high
margin
assets,
based
on
increasing
the
net-­‐asset-­‐value
of
the
firm
on
a
per
share
basis,
and
maintaining
a
high
level
of
cash
flow
to
capitalize
on
attractive
prospects
(Franco-­‐Nevada).
The
company
not
only
focuses
on
creating
new
royalty
streams
but
also
acquires
royalties
from
outside
investors.
Franco-­‐Nevada
holds
a
total
of
342
assets,
with
178
producing
and
25
in
the
advanced
stage
of
production.
17

18. The
company
strives
to
include
only
the
most
attractive
assets
but
states
that
it’s
open
to
acquiring
new
resources.
Gold
remains
the
predominant
revenue-­‐generating
commodity
for
Franco-­‐Nevada,
accounting
for
75%
of
total
revenue.
Overall,
the
company
seeks
to
maintain
a
portfolio
of
asset
in
politically
stable
regions
to
avoid
increased
operating
volatility
by
only
holding
17%
of
revenue
generating
assets
in
major
mining
regions
other
than
the
United
States,
Canada,
Mexico,
and
Australia.
The
firm,
“anticipates
revenues
in
the
$430
to
$460
million
range
this
year,
and
it
has
$987
million
cash-­‐in-­‐hand,
$95
million
in
marketable
securities
and
an
undrawn
$175
million
revolving
credit
line”
(Keevil).
Franco-­‐Nevada
stock
has
had
~65%
gain
over
the
past
two
years
with
a
market
cap
of
$7.51
billion.
Cosmos
Chiu,
an
RBC
World
Markets
analyst,
“believes
Franco-­‐Nevada
will
continue
to
grow
its
net
asset
value
both
organically
and
through
acquisitions,
where
recent
market
conditions
have
been
tough
on
mining
companies
and
their
ability
to
gain
financing.
One
pushback
from
investors
on
Franco-­‐Nevada
has
always
been
that
the
shares
are
expensive.
We
disagree
with
that
assessment,
but
rather
would
argue
that
the
share
price
outperformance
reflects
Franco-­‐
Nevada’s
ability
to
generate
shareholder
value”
(Keevil).
Although
the
company
has
become
a
dominant
intermediary
in
the
royalty
streaming
space,
Franco-­‐Nevada
still
appears
to
be
an
attractive
investment
based
on
its
growth
ability.
Franco-­‐Nevada
maintains
offices
in
the
United
States,
Canada,
Australia,
and
Barbados,
and
is
led
by
David
Harquail,
President,
CEO,
and
Director,
who
previously
held
executive
positions
with
Newmont
Mining.
www.franco-­‐nevada.com
Bullion
Monarch
Mining
(BULM):
Bullion
Monarch
Mining
is
based
in
Utah
and
operates
as
a
gold-­‐focused
exploration
and
royalty
company,
in
addition
to
managing
three
subsidiaries:
Dourave
Canada,
Dourave
Brazil,
and
EnShale.
The
firm’s
current
portfolio
of
properties
includes
the
Carlin
Royalty
(Nevada),
North
Pipeline
(Nevada),
Maggie
Creek
(Nevada),
Ophir
Property
(Utah),
and
Gold
Mountain
(Oregon).
Additional
operating
efforts
include
the
exploration
of
gold
and
bauxite
in
Brazil
through
its
subsidiary
Durave
Brazil,
currently
holding
four
major
projects.
The
company
is
also
working
to
develop
the
technology
to
extract
oil
from
shale
rock
through
its
subsidiary
EnShale.
In
2011,
the
firm
generated
$6.2
million
in
revenue
and
$0.05
earnings
per
share.
Bullion
Monarch
was
recently
acquired
by
Eurasion
Minerals
Inc.,
resulting
with
the
firm
being
a
wholly
owned
subsidiary
of
Eurasion
Minerals.
Key
management
includes
Don
Morris,
Chairman
&
CEO,
and
James
Morris,
President.
Mr.
Don
Morris
is
often
recognized
for
his
involvement
with
the
development
of
the
Carlin
Trend
in
Nevada.
www.bullionmm.com
18

19. Royal
Gold
(RGLD):
Royal
Gold
currently
operates
with
a
focus
on
acquiring
and
managing
precious
metal
royalties,
with
a
predominant
gold
focus.
The
company’s
current
portfolio
holds
26
producing
properties
and
26
development
stage
properties.
Strong
financial
results
over
the
past
two
years
have
placed
Royal
Gold
in
an
advantageous
position
to
capture
a
larger
market
share
of
the
streaming
space.
The
company
has
produced
a
compounded
annual
growth
rate
over
the
past
decade
of
28%
in
revenue
per
share,
37%
in
EBITDA
per
share,
and
35%
in
earnings
per
share
(Royal
Gold).
Over
the
past
two
years,
Royal
Gold
stock
has
achieved
a
73%
return
and
currently
trades
at
a
stock
price
near
it’s
52-­‐week
high
of
$85.
The
firm
is
based
in
Denver,
CO.
Key
management
includes
Tony
Jensen,
President
and
CEO,
Stefan
Wenger,
CFO,
and
Karen
Gross,
VP
and
Corporate
Secretary.
Mr.
Jensen
has
a
wide
array
of
industry
experience,
previously
working
on
the
Cortez
Joint
Venture
and
Placer
Dome.
www.royalgold.com
Anglo
Pacific
Group
(APY.TSX):
The
Anglo
Pacific
Group
holds
a
broad
portfolio
of
royalties
on
commodities
in
raw
materials,
precious
metals,
and
uranium.
Company
strategy
includes
the
acquisition
of
royalties
on
long-­‐
life
minerals
that
are
located
in
politically
stable
regions.
Major
producing
streams
are
located
in
Brazil
(Iron
Ore),
Europe
(Gold),
and
Australia
(Coal).
The
firms
current
portfolio
allocation
includes
53%
of
assets
in
Coal,
21%
in
Iron
Ore,
11%
in
Gold,
4%
in
Chromite,
3%
in
Copper,
3%
in
Uranium,
and
the
rest
spread
amongst
platinum,
nickel,
and
other
commodities.
Anglo
Pacific
currently
trades
at
a
stock
price
of
$4,
with
a
$438.42
million
market
cap.
Out
of
all
primary
competitors
in
the
royalty
streaming
space,
the
Anglo
Pacific
group
is
positioned
for
strong
growth
due
to
the
majority
of
assets
being
in
the
development
or
pre-­‐development
stage.
The
firm’s
head
office
is
based
in
London,
UK.
Key
management
includes
Peter
Boycott,
Executive
Director
and
Chairman,
and
John
Theobald,
Executive
Director
&
CEO.
www.anglopacificgroup.com
Callinan
Royalties
Corp.
(CAA.V):
Callinan
Royalties
Corp.
is
one
of
the
newer
competitors
in
the
royalty
streaming
space,
with
Canadian
mining
roots
dating
back
to
1927.
The
firm
split
into
two
separate
divisions
in
2011,
creating
two
distinct
companies
that
are
focused
purely
on
exploration
and
royalties,
respectively.
The
firm
is
known
for
its
dominant
acquisition
of
a
royalty
on
the
Hudson
Bay
777
mine.
The
company’s
stock
has
produced
a
40%
return
over
the
past
two
years.
Key
Management
includes
Roland
Butler,
President
&
CEO,
and
Tamara
Edwards,
CFO.
Mr.
Butler
held
a
dominant
role
as
co-­‐founder
of
Altius
Minerals
Corp.
and
is
currently
the
director
of
Millrock
Resources
Inc.
19

20. www.callinan.com
Gold
Royalties
Corporation:
Gold
Royalties
Corp
is
a
mining
royalty
company
focused
on
acquiring
both
operating
and
prospective
interests
throughout
Canada.
The
current
royalty
portfolio
includes
agreements
on
seven
producing
and
exploratory
streams;
comprised
of
commodities
in
gold,
nickel,
silver,
zinc,
lead,
platinum,
copper,
and
other
precious
metals.
The
Gold
Royalties
team
is
led
by
Ryan
Kalt,
founder
and
CEO,
and
sources
multiple
industry
advisors
to
consult
on
prospective
acquisitions.
The
firm
was
founded
in
2012
and
is
based
in
Calgary,
Alberta,
CA.
www.goldroyalties.ca
*
See
appendix
for
an
overview
of
secondary
and
consulting
firms
in
the
royalty
streaming
industry.
20

21.
5. Perspective
Through
a
critical
analysis
of
the
royalty
streaming
industry
it
becomes
clear
where
the
true
value
of
the
operation
is
derived.
Without
a
portfolio
of
quality
reserves
and
proven
management
at
both
the
financing
and
operating
firms
the
underwriter
will
be
left
vulnerable
to
numerous
threats
that
otherwise
are
manageable.
Future
successes
in
the
royalty
financing
space
are
contingent
upon
the
project’s
true
value
and
the
quality
of
resources
and
operators.
Richard
Karn,
managing
editor
of
the
Emerging
Trends
Report,
conveys
the
importance
of
producers
to
hedge
future
production
by
stating:
Difficulty
arranging
financing…
has
been
an
issue
for
small
companies
since
at
least
2006
or
2007
and
was
exacerbated
by
the
global
financial
crisis
and
its
aftermath.
What
complicates
the
financing
picture
considerably
for
specialty
metals
companies
is
that
many
specialty
metals
cannot
be
hedged
by
selling
production
forward.
From
a
commercial
point
of
view,
if
you
cannot
hedge
your
protection
to
protect
the
bank,
your
terms
–
if
you
can
get
them
–
will
be
very
onerous.
I’d
prefer
a
company
to
hedge
15-­20%
of
its
production
to
guarantee
its
mine
goes
into
production”
(Sylvester).
Royalty
stream
financing
has
gained
more
attention
because
it
allows
the
mine
operator
to
hedge
the
acquisition
of
capital
with
future
production
and
allows
end-­‐users
to
set
the
terms
of
agreement
and
maintain
a
higher
level
of
price
secrecy
(Sylvester).
Because
these
assets
are
illiquid
and
not
heavily
traded,
prices
are
determined
from
each
party’s
interest
in
the
terms
of
agreement.
COMMODITY
HEDGE:
From
a
royalty
financier’s
perspective,
depending
on
the
terms
of
a
streaming
agreement,
future
cash
flow
remains
subject
to
fluctuations
in
underlying
commodity
prices.
Royalty
streaming
companies
fund
mine
production
with
an
initial
capital
outlay
and
then
benefit
from
a
later
royalty
on
the
production
amount,
resource
market
value,
or
operations
net
profit.
Even
though
royalty-­‐streaming
companies
rarely
take
hold
of
the
physical
resource,
negative
price
movements
in
the
interim
threaten
future
cash
flow.
As
an
improvement
to
the
royalty
financing
strategy,
it
is
advisable
to
structure
derivative
contracts
that
capture
upward
price
mobility
and
protect
against
unforeseen
interest
rate/commodity
shocks.
Because
the
space
is
relatively
young,
finding
counterparties
to
take-­‐
on
the
risk
associated
with
illiquid
resources
poses
a
challenge.
Another
downside
to
commodity
hedges
is
potentially
limiting
upward
price
movements.
If
effectively
crafted,
the
royalty-­‐streaming
firm
can
lower
its
portfolio
risk
while
increasing
potential
revenue.
The
Chicago
Mercantile
Exchange
(CME)
offers
futures
and
options
contracts
on
only
the
most
heavily
traded
and
liquid
metals,
not
including
many
of
the
resources
that
royalty-­‐financing
companies
often
stream.
Although,
major
firms
competing
on
the
fluctuation
of
gold
or
silver
pricing
can
benefit
from
the
wide
array
of
financial
products
offered.
Below
is
a
chart
of
the
current
metals
contracts
offered
by
the
CME:
21

22.
Source:
Chicago
Mercantile
Exchange
The
use
of
a
commodity
hedge
not
only
increases
financing
costs
but
also
raises
the
regulatory
compliance
burden.
Increased
financing
costs
are
incurred
from
the
active
management
of
a
portfolio
of
contracts
and
increased
regulatory
burdens
arise
from
compliance
with
heightened
accounting
standards
and
government
oversight.
Royalty
streaming
firms
must
weigh
the
increased
costs
of
using
these
contracts
against
the
benefits
gained
from
decreased
volatility
in
price
movements.
Consulting
with
an
advisor
to
arrange
outside
sources
as
counterparties
to
take
on
such
risk
could
lead
to
more
amiable
terms,
relative
to
the
standard
contracts
listed
above.
As
an
alternative
to
traditional
streaming
agreements
with
commodity
hedges,
industry
participants
could
move
to
spot
based
pricing
in
contract
terms.
Spot
based
pricing,
without
a
hedge,
would
protect
financiers
against
negative
fluctuations
because
the
royalty
rate
would
follow
current
market
conditions,
but
leave
the
mine
operator
subject
to
negative
price
adjustments.
With
this
type
of
agreement,
the
increased
costs
of
spot
based
pricing
would
benefit
the
financier
greater
than
the
operator,
leading
to
a
less
equitable
royalty
rate.
But,
if
the
terms
of
agreement
only
include
spot
based
pricing,
the
royalty
streaming
company
could
utilize
an
additional
hedge
against
the
market
to
arbitrage
price
fluctuations.
22

23.
STREAM
SECURITIZATION:
Additional
improvements
to
the
current
model
include
the
possible
securitization
of
royalty
streams
to
diversify
the
financier’s
portfolio
risk.
The
limited
liquidity
across
the
majority
of
mining
companies
restricts
available
financing
options.
If
royalty
financiers
bundled
and
sold
streams
in
tranches,
similar
to
the
securitization
of
mortgages
as
collateralized
debt
obligations
(CDOs),
this
would
create
a
more
liquid
market
to
trade
resource
vehicles
and
propel
the
number
of
firm
acquisitions.
This
could
create
an
active
market
where
investors
would
buy
and
sell
bundles
of
royalty
streams.
Projects
might
be
categorized
by
resource
quality,
mine
location,
or
length
of
forecasted
production.
The
pools
of
illiquid
streams
would
be
converted
into
financial
instruments,
potentially
lowering
industry
volatility
and
increasing
liquidity,
financing,
and
term
opportunities
for
both
parties.
Below
is
a
graphic
of
risk
and
return
characteristics
for
the
mortgage
securitization
process
that
could
be
similarly
applied
to
the
mine
financing
space.
Source:
Splettstoesser
23

24.
Looking
Forward
Developed
economies
tend
to
be
the
major
consumer
of
resources
and
undeveloped
economies
largely
hold
the
producing
assets.
Population
growth
continues
to
increase
exponentially,
yet
the
available
resources
and
infrastructure
to
support
a
society
of
this
size
remains
fairly
unchanged,
forcing
many
governments
to
continue
to
increase
resource
regulation
in
attempt
to
sustain
their
citizens.
The
majority
of
developed
economies
will
likely
maintain,
or
even
decrease,
current
mineral
production
due
to
increased
regulation
and
environmental
costs,
while
undeveloped
economies
are
likely
to
increase
mineral
production
through
foreign
investments.
A
convergence
between
developed
regulatory
standards
is
likely
to
take
place,
as
the
lack
of
consistent
and
transparent
policies
allows
for
exploitation.
A
favorable
regulatory
environment
should
accelerate
this
transition
in
mine
locations
from
developed
to
undeveloped
markets.
INVESTMENT
OPPORTUNITIES:
Opportunities
for
future
investment
within
the
space
continue
to
expand
due
to
increases
in
global
resource
demand,
commodity
price
volatility,
and
volatility
across
financial
markets.
The
current
supply
of
resources
is
limited
by
the
economic
feasibility
of
mining
projects.
Due
to
this,
as
demand
pushes
resource
prices
higher,
the
required
return
that
makes
the
project
economically
feasible
(cost-­‐benefit
trade
off)
is
pushed
lower.
Projects
that
were
unfeasible
before
are
now
profitable,
spurring
increased
exploration
and
mine
expansion.
The
commodities
market
has
seen
drastic
growth
over
the
past
two
decades,
with
much
of
the
skyrocketing
demand
for
metal
and
mineral
consumption
attributed
to
emerging
markets.
China
has
become
the
largest
consumer
of
refined
metals
through
its
growth
in
infrastructure
spending,
with
metals
consumption
today
17-­‐times
higher
than
in
1990
(The
World
Bank).
As
the
graphs
below
display,
China’s
metals
consumption
and
intensity
relative
to
GDP
have
drastically
increased
over
this
period.
Source:
The
World
Bank
24

25. High
demand
in
China
has
been
instrumental
in
driving
the
commodity
super-­‐cycle
over
the
past
two
decades
(Cuddington,
Jerrett).
To
protect
against
price
volatility
associated
with
super-­‐cycles,
investors
must
constantly
seek
more
efficient
vehicles
that
offer
higher
returns
and
lower
risk.
Mineral
resource
streaming
allows
for
this
opportunity
while
maintaining
flexibility
in
the
terms
of
agreement.
Another
key
factor
driving
demand
for
mineral
resource
streaming
are
the
unstable
global
financial
markets.
They
have
been
driven
by
crisis
and
uncertainty
over
the
past
five
years,
starting
with
the
crash
of
the
housing
market,
leading
to
global
government
stimulus
and
bailouts.
Ramifications
stemming
from
these
events
have
compounded,
allowing
for
drastic
fluctuations
in
prices
as
markets
clear.
The
funding
of
large-­‐scale
conglomerate
mine
operators
typically
comes
through
internal
or
partner
sources,
like
a
separate
financing
division
or
independent
financial
institutions
that
can
lend
to
these
borrowers
given
their
massive
scope
and
amount
of
assets
held
as
collateral.
Their
ability
to
acquire
capital
is
less
challenging
relative
to
smaller
operations.
Junior
exploration
and
production
companies
struggle
to
receive
capital
through
traditional
financing
routes
due
to
the
high
risk
associated
with
explorative
ventures
and
overall
limited
company
scope.
GROWTH
OUTLOOK:
In
the
short
term,
the
potential
for
growth
in
mineral
resource
streaming
is
restricted
by
a
supply
of
quality
mines.
Increases
in
metal
demand
support
explorative
and
expansive
activity
by
driving
commodities
prices
higher.
The
cost-­‐benefit
of
individual
mines
adjusts
as
underlying
markets
fluctuate,
resulting
in
some
projects
that
were
previously
economically
unfeasible
now
being
profitable.
Main
drivers
of
industry
growth
for
royalty
streaming
companies
are
the
underlying
commodity
prices
and
the
prospects
for
future
acquisition.
Commodity
prices
will
likely
slow
in
growth
relative
to
performance
over
the
past
decade
but,
as
discussed
above,
major
population
shifts
among
emerging
markets
will
be
the
main
driver
of
consumer
demand
and
ultimately
increase
the
capital
requirement
necessary
for
mine
operators
to
expand.
The
robustness
of
a
royalty
streaming
company
significantly
influences
these
growth
drivers
and
future
expansion
opportunities.
A
challenge
for
royalty
streaming
firms
is
managing
operating
and
capital
expenditures.
As
a
firm’s
portfolio
of
streams
grows,
industry
participants
have
noticed
consistent
increases
in
both
of
these
costs.
In
order
to
provide
consistent
and
strong
company
growth,
management
will
need
to
control
these
increases
to
maintain
profitability.
Large
mining
firms
typically
hold
the
highest
quality
projects
and
are
offered
the
best
explorative
ventures
before
smaller
companies
because
of
established
firm
networks
and
resources.
These
larger
firms
often
categorize
the
funding
of
projects
by
the
type
of
operation,
either
Brownfield
or
Greenfield.
Brownfield’s
are
usually
less
costly
and
considered
the
expansion
of
an
already
claimed
mine.
Greenfield’s
are
the
exploration
of
a
completely
separate
region
and
often
result
in
the
formation
of
a
smaller
exploration
subsidy
of
the
larger
company.
Small
scale
mine
operators
are
left
to
extend
on
previously
mined
claims
or
to
25

26. explore
regions
not
already
claimed
by
larger
operators.
This
restricts
growth
in
the
short
term
by
confining
industry
potential
to
the
current
supply
of
quality
projects.
An
additional
factor
that
significantly
influences
growth
in
the
short
term
is
government
interference
through
royalties,
subsidies,
and
the
nationalization
of
private
firms.
Government
royalties
are
a
tax
on
the
mining
of
a
resource
intended
for
the
larger
good
of
the
country.
Increased
costs
of
production
will
drive
companies
to
enter
new
markets
in
order
to
remain
competitive.
It
is
important
for
governments
and
mining
firms
to
work
together
throughout
any
implementation
process
so
they
do
not
debase
the
investment
climate.
Local
operating
firms
create
the
mining
industry;
the
government
should
utilize
their
knowledge
and
resources
when
analyzing
the
effects
of
a
royalty
(Otto,
Andrews,
Cawood,
Doggett,
Guj,
Stermole
F.,
Stermole
J.,
Tilton).
As
a
source
of
growth,
certain
government
royalty
schemes
can
be
implemented
in
a
fashion
that
holds
greater
benefit
to
both
sides
and
remains
attractive
to
future
investment.
Governments
have
gone
so
far
as
to
nationalize
firms
or
subsidize
resources
to
promote
political
and
social
objectives.
The
nationalization
of
private
firms,
like
YPF
Oil
in
Argentina,
threatens
the
investment
climate
of
certain
regions
due
to
fears
of
similar
policies
being
applied.
Richard
Karn,
managing
editor
of
the
emerging
trends
report,
notes
the
challenges
faced
by
miners
in
parts
of
Southern
Africa,
Indonesia,
and
Mali.
Karn
believes
that:
“Nationalization
risk
is
the
biggest
single
threat
facing
the
industry
in
the
years
ahead…
mining
projects
are
easy
targets
for
corrupt
politicians
intent
on
enriching
themselves
and
their
cronies
by
cloaking
their
greed
behind
nationalist
rhetoric
about
how
mining
projects
exploit
the
peoples
resources”
(Sylvester).
Governments
should
be
careful
not
to
degrade
market
integrity
by
over
taxing
firms
or
to
heavily
subsidizing
resources,
manipulating
the
economy
by
forcing
disequilibrium
between
resource
supply
and
consumer
demand.
Erratic
government
interference
will
inhibit
industry
growth
and
drive
investors
to
enter
more
appealing
markets.
In
the
long
term,
recovering
financial
markets
will
push
demand
for
royalty
streaming
higher
as
mine
operators
in
search
of
capital
choose
this
option
as
their
most
equitable
financing
route.
Although
upward
price
mobility
is
limited
by
streaming
agreements,
the
mine
operating
environment
over
the
long
term
is
expected
to
maintain
pace
with
forecasted
consumer
demand
increases,
also
raising
the
need
for
alternative
financing
avenues.
Shifts
of
mid-­‐level
and
major
mining
firms
turning
from
traditional
financing
options
to
royalty
streaming
are
already
becoming
more
predominant,
as
one
of
the
latest
deals,
“Inment
Mining
Corp…
plans
to
raise
roughly
$1
billion
from
a
stream
deal
to
fund
a
portion
of
the
construction
costs
for
it’s
$6.2
billion
Cobre
Panama
copper
project
in
Central
America”
(Rocha).
As
mine
operators
search
for
the
most
efficient
borrowing
terms
to
fund
production,
a
shift
away
from,
or
blend
of,
the
traditional
financing
model
should
continue
to
drive
royalty
stream
financing
demand.
26