KPMG lists ‘access to capital’ as the third biggest risk to the mining industry in 2020. Royalty companies offer a possible solution to cash-strapped companies looking for capital. In return, these companies get a share of the revenue. Elemental Royalties is a new company in this space and was recently listed in Canada. Frederick Bell, CEO and founder, of the company spoke to Commuro Wire.

Q: What are royalty companies?

A: I often make the analogy with music. When you hear a song on the radio, there may be a royalty paid to the artist, the recording studio and the person who wrote the song. Mining royalties are somewhat similar. In mining a royalty maybe given to the person who discovered it, perhaps to those who took it along that journey and even to the landowner (in some jurisdictions). A royalty is a right to receive a certain amount of revenue from the mine. These are typically gross royalty revenues. That’s what Elemental’s business focusses on – gross royalties or net smelter royalties (in precious metals) on different mines.

Q: What kind of companies do you work with?
A: Often good quality operators don’t need to write royalties. They can raise money through the capital markets or through debt themselves. All the royalties we’ve bought are third-party royalties. Going back to my analogy: we have been buying royalties from artists, or the song creators, or the recording studios rather than the end product. In mining terms, that means sometimes, we are going back to the original exploration geologists. Or we are going back to a junior company that previously had it (the royalty), or in some cases, larger corporates who had some involvement in the mine and sold their stake but retained a royalty.

Frederick Bell talks about royalty companies in mining and why he thinks they can provide a lifeline to projects across the world.

Q: How do you build a good portfolio?
A: Our company’s focus has always been on reducing the risk. This means having a diversified portfolio which consists of five or six good quality producing royalties. Why do I say that? Well, let’s take Covid-19 and the disruption it has caused. A mine shuts down for a prolonged period, this could be because of travel restrictions, or if parts can’t move and or goods can’t be transported. (This leads to a mine being put under care and maintenance for a long time).The benefit of the royalty model is that if you have a portfolio of 4-5 different mines, in 4-5 different countries, with 4-5 different operating teams and companies who manage them, you reduce your risk from the outset. We have very low overheads because we don’t operate any of the assets ourselves. This it enables us to be much more diversified than the mid-tier mining companies that are much bigger.

Q: Is the royalty model growing outside North America

A: We see this (i.e. educating investors about the royalty model in Europe/ Australia) as an opportunity. We’d like to take advantage of a market that really knows the royalty space well (North America). We’d then like to ride the wave and increase awareness and interest from mining investors in the UK and Australia. That will probably open more doors and give us more opportunities. For now, we do have a strong contingent of investors from Europe and Australia and that always bring something different to the table.

Q: How are you making mining better?

A: In mining, the challenge always seems to be around attracting capital to fund development. Historically it has been a cyclical industry. This is partly because of shortage of capital and party because of commodity prices. If royalty companies can attract capital, because investors see them as diversified way to play the market, that in turn enables royalty companies to provide more money to the operators. Everything that the mining industry can do to reduce that cyclicality is probably beneficial for the industry as a whole and all the communities that are supported or employed by mines.

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