Some investors venture into the mining sector because of its high potential returns. What many aren’t aware of is precious metals royalties, which have high upside potential and long-term revenues. Precious metals royalties also often outperform other income investments, potentially making them a good investment.
Royalties were created between mining firms and prospectors so prospectors could gain long-term revenue from the development of their discoveries. Gradually, royalty agreements became a funding mechanism that allowed mine operators to receive up-front funding for the development of mines in exchange for 1% to 3% of the lifetime revenue generated by the mine.
Once created, these interest-bearing agreements can be sold and bought as income assets, which allows royalty firms to build and purchase a diverse portfolio made up of income-generating royalties.
Royalties are usually calculated from the top line revenue of a mine, which means that royalty holders aren’t affected by a mine’s administrative or operational expenses. Royalties offer exposure to the mine’s resource expansion and increases in production, while also providing holders with a percentage of a mine’s revenue for its project life.
Royalties also offer holders upside exposure to further expansion and investment of mines, along with life extensions and mine restarts. Some catalysts that significantly increase a royalty’s returns include:
Reserve increases
Further discoveries that grow a mine’s resources and/or reserves can extend the value and life of a mining project, and compound returns for holders of royalties.
Mine extensions
Additional investment into mining projects also extend the operating lives of mines, which offers royalty holders more returns.
Increases in commodity prices
Increases in commodity prices can also make some mines either profitable enough to recommence their operations or more profitable, which provides royalty holders with more significant returns. A good example of a value-driving catalyst substantially growing the return on investment of a precious metal’s royalty is royalty purchased by Franco-Nevada on the Goldstrike mine. Franco-Nevada bought royalty on Goldstrike for $2 million in 1986. Initially, Goldstrike had gold reserves of 600,000 ounces. However, a discovery made in 1989 increased the operation’s reserves to 20 million ounces, which made it one of the biggest gold mines in the world.
Currently, Goldstrike has produced more than 44 million ounces of gold, with royalty purchased by Franco-Nevada providing extraordinary returns on its $2 million purchase price. Thus far, the royalty has paid the company more than $1 billion in revenue, which is about 500 times its initial investment.
Given such a case study of how potentially lucrative royalties agreements can be, it would be interesting to do research and find out what sort of royalties agreements precious metals extractors such as StraightUp Resources Inc. (CSE: ST) (OTCQB: STUPF) may offer.
NOTE TO INVESTORS: The latest news and updates relating to StraightUp Resources Inc. (CSE: ST) (OTCQB: STUPF) are available in the company’s newsroom at https://ibn.fm/STUPF
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