Resource Investors Could See Rewards, Less Risk With Royalty Companies

By Angela Harmantas

The constrained availability of capital and lack of debt financing is causing grief for all but one segment of the mining industry – royalty and streaming companies are flourishing, consistently outperforming the gold index over the past few years.

With traditional financing options dwindling, mining companies are seeking royalty agreements to help fund their exploration and eventual production. In exchange, the royalty company gets a percentage of the producer’s revenues once it’s in production and avoids any operational or capital risk associated with getting the ore out of the ground. It’s about as close to a safety net an individual can get in the high-risk world of mining investment.

Unsurprisingly, the business model is attracting serious attention from investors. Frank Holmes, CEO and Chief Investment Officer at U.S. Global Investors singled out the three main royalty companies – Franco-Nevada FNV, Royal Gold RGLD and Silver Wheaton SLW – as stocks to watch in an interview with SmallCapPower.com. “If you look at the gold index for the past three years, it’s down, but these royalty companies have outperformed the index,” he said. “It’s a high-margin business, robust with intellectual capital.”

Following an April 2014 joint takeover by Yamana Gold and Agnico Eagle Mines, Osisko Gold Royalties (TSX: OR) transitioned from a production company into a royalty model, retaining a 5% net smelter return (NSR) royalty on the massive Malartic gold mine in Quebec, which had previously been an Osisko Gold-owned and operated project. The company also owns a small royalty on Goldcorp’s Éléonore mine in Ontario and has a handful of other royalties throughout Canada.

Given the superior performance of these stocks over the past few years, a number of junior companies are banking on a similar model. Names like Altius Minerals (TSX: ALS), Abitibi Royalties (TSXV: RZZ) and Sandstorm Gold SAND have adopted the royalty model and are succeeding at much smaller share prices.

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