Royalties imposed on mines are a significant factor in the profitability of the mine. One government after another is seeking to increase the royalty payment from mines to their government coffers. Alberta recently enacted a new royalty payment on the oil sands. The U.S. Congress in seeking to revise the 1872 Mining Law, is considering imposing royalties on new U.S mines and using the money to pay for abandoned mine cleanup.
Simply viewed, a royalty, as its name implies, is a payment made by the miner to the King, Queen, or other royal person - now-a-days just the government - for the right to mine the minerals which are considered in law to belong to the Crown, government, or whoever holds the power over the territory. As stated by the Queensland Government in Australia:
Mining and petroleum royalties represent a payment to the owners of a resource for the right to extract it. As the state owns all petroleum and gold and most minerals. Royalties on these commodities are normally paid to the state government through the Department of Mines and Energy.
In practice the accounting of royalty payments by mines is complex. Lawson Lundell, in their publication Understanding Royalty Structures notes;
There are two major types of royalties in the North American mining industry today. They are the net smelter returns royalty and the net profits interest royalty. A third type of royalty, the gross overriding royalty, is sometimes used in relation to diamonds and thus is becoming better know outside the oil and gas industry, where it originated.
The question for the average investor is how can you benefit from this ancient system? Fact is that you can invest in Royal Gold. This is a company working out of Denver, Colorado. They use the concepts and laws of the royalty system to invest in mines and mining properties. They are one of the very few who do…again because the law and practice is complex. But the profits can be huge as the risks are small. Consider what they say on their website:
The distinction between a royalty company and a mining company is very important in the current market environment where the costs to build and operate mines are rising significantly. The Company’s royalty portfolio provides investors with a unique opportunity to capture value in the precious metals sector without incurring many of the risks associated with mine operations such as capital costs, operating costs, and environmental liabilities.
Royal Gold owns a large portfolio of active, developing and exploration style royalties located in some of the world’s most prolific gold regions. While the company does not have to contribute to exploration costs, exploration successes by the operators of the royalty properties benefit Royal Gold as well, when new reserves are produced.
With a successful business model and business strategy that generates strong cash flow and high margins due to its low cost structure, Royal Gold provides shareholders with a premium precious metals investment in a lower risk vehicle.
The success makes them expensive, but for the rich or cautious investor, this is a company to consider. And if you can find other companies that do the same sort of thing, particularly if they are just starting up and you trust them, my advice would be to invest. Also avoid mines in greedy countries where the King, Queen, or Dictator is seeking to grow rich exacting undue mining royalties.