Royalty & Streaming Vs. Operating Companies
- What are the differences between a royalty company and an operating (driller or miner) company?
Royalty and streaming companies essentially loan large amounts of money to the operating company who does the physical drilling and mining of the precious metal in return for a portion of future production or revenue. Typically there are three different types of royalties these companies use which include: Net Smelter Royalty, Streaming Royalty, and Net profits Royalty. A Net Smelter Royalty is when the holder receives a share of the revenues from the mine at a rate that is typically between 2% to 5%. This is simply a share of the revenue the operator receives that is paid to the holder, prior to the deduction of smelting and operating costs. Streaming Royalties is an agreement that gives the holder the right to purchase a proportion of the production of the mine at a fixed rate. As an example, the rate could be 30% of the actual (fluctuating) metal price. Lastly, a Net Profits Royalty is strictly based on the profitability of the mine and the holder will receive payments that range anywhere from 2% to 5%. The only difference between the Smelting Royalty is that operating expenses are deducted from the Net Profits royalty.
- What are the differences in the key financial metrics of these two types of companies?
In the excel file below it shows some of the key metrics analysts use to evaluate stocks and their overall performance. The first three metrics we chose to use were: the quick ratio, which measures a company’s short term liquidity position, debt to equity ratio, which shows the financial leverage a company has, and working capital turnover, which lets us understand how efficiently a company uses its working capital to generate sales. The next couple metrics we used were: the price to earnings ratio, which essentially is the earnings multiple for a company, earnings per share, showing how much money they make from each share of outstanding stock, return on equity ratio, measuring a company’s profitability and how effectively they are generating those profits, and finally the pretax margin, which measures the operating efficiency of a company. Some of the larger corporations we chose to include are Barrick Gold Corp., Agnico Eagle Mines, Franco Nevada Corp., Wheaton Precious Metals, Texas Pacific Land Corp., and Exxon Mobil. From top to bottom, the first chart presents each companies financial metrics at the end of Q1 2022, including their growth performance over both the past 5 and 10 years. The second chart shows the financial metrics through Q1 2021, and the third chart shows the difference. The difference chart is simply subtracting the second chart from the first to see which companies saw an increase or decrease in the following metrics.
Roaylty Vs Streaming Companies Metrics: