Royalties and Streams Explained

Royalties are ongoing interests in the production or future production from a property and, depending on their terms and the laws applicable to the royalty and the project, in general share the following characteristics:

  • They are not subject to cash calls to fund exploration, development, capital, environmental or closure costs and so are lower risk in this respect than an operating interest.
  • They provide exposure to the upside of commodity prices as well as increases in Mineral Reserves and production.
  • In some cases, they provide an interest in new discoveries made on a property which can result in significant value creation for Franco-Nevada.
  • They do not involve operational or development management so a large and diversified portfolio can be assembled without the need for significant corporate overheads.
The two most common royalty types are:

Revenue-based Royalties are based on the value of the production or net proceeds received by the operator with defined deductions as specified by the royalty contract. Some forms of revenue-based royalties in the mining and energy industries are:

  • “NSR” Net Smelter Return Royalty
  • “ORR” Overriding Royalty
  • “GR” Gross Royalty
  • “FH” Freehold or Lessor Royalty

Profit-based Interest Royalties are based on the operating profit as defined in the royalty contract. Often, royalty payments only begin after the operator has recovered its capital costs. The net profits interest royalty (“NPI”) is the most common form of these royalties. Similar to an NPI, a net royalty interest (“NRI”) is paid net of operating and capital costs.

In addition to royalties, Franco-Nevada holds stream and working interests:

Streams are metal purchase agreements that allow the holder of the agreement to purchase all or a portion of the gold, silver or other products from a mine in exchange for an upfront payment and an additional payment on each delivery. Streams are particularly well suited to co-product production providing significant value for by-product precious metal production. Streams are not royalties because they are not an interest in land and there is an ongoing cash payment required to purchase the physical metal.

Working Interest (“WI”) holders have an ownership position in the property and operation and hence are liable for cash calls on their share of capital, operating and environmental costs usually in proportion to their ownership percentage. Working interests are not considered to be royalties because of their ongoing funding requirements although, for profitable operations, they can be economically similar in their calculations to NPIs.



An example of the financial impact of each different structure is provided below.

An example of the financial impact that compares the value per ounce to Franco-Nevada of a 4% NSR, a 4% stream or a 4% NPI or WI. Based on this example, a comparable percentage NSR is 2.3 times more valuable than an equivalent Development NPI or WI and almost 1.3 time more valuable than a stream interest.

How we Estimate “Royalty Ounces” 

A traditional NSR royalty on a gold mining property provides FrancoNevada with a simple percentage of the revenue or gold in-kind produced from that property. For example, if we have a 2% NSR royalty on a property, we calculate 2% of the stated Mineral Resources and Mineral Reserves as our “Royalty Ounces”. Note we do not make adjustments for recoveries and refining fees for gold NSRs as they are typically minor. When calculating Royalty Ounces for a property our objective is that they should be comparable to an attributable gold NSR Royalty Ounce. To achieve comparable Royalty Ounce figures, we make adjustments in the following circumstances:


  1. The royalty or stream does not cover all the Mineral Resources or Mineral Reserves on a property:
    We provide our best estimate of the percentage of Mineral Resources and Mineral Reserves that are attributable to our interest.
  2. A stream interest with an associated ongoing cost per ounce:
    The number of attributable stream ounces are factored to make them economically equivalent to a NSR ounce. For example as illustrated on this page, at a $2,800 per ounce gold price and a $400 cost per ounce, the stream ounces are factored by 85.7%. The factor depends on cost per ounce or the percentage margin written in the agreement.
  3. A NPI royalty:
    A NPI is subject to the operating and capital costs specific to each asset. We generate our own internal mine life projections for each asset to determine a reasonable estimate of the economic equivalent of a gold NSR Royalty Ounce using a $2,800 gold price assumption.
  4. An asset producing silver, PGM or base/bulk metal:
    The number of attributable silver, platinum or palladium ounces, and attributable base/bulk metals pounds/tonnes are converted into Royalty Ounces.
    This year’s pricing assumptions for conversion include: $2,800 per ounce gold, $31 per ounce silver, $950 per ounce platinum, $950 per ounce palladium, $4.25 per pound copper, $7.89 per pound nickel, $1.25 per pound ferrochrome and $100/t Fe 62% CFR China for our calculations. For copper, nickel, ferrochrome and iron ore Royalty Ounce calculations, we do reflect deductions for processing and refining as they are more material compared to a typical gold NSR asset.

 

In the Assets section of this 2024 Asset Handbook, we provide details for each asset that include summary figures for the Mineral Resources (M&I Resources inclusive of P&P Reserves), Mineral Reserves (P&P Reserves) and Inferred Mineral Resources (Inferred Resources). We also provide the related M&I Royalty Ounces, P&P Royalty Ounces and Inferred Royalty Ounces for each of those assets and the key guidance and assumptions that were required to derive those Royalty Ounces. Readers are cautioned that the Royalty Ounces are prepared by the management of Franco-Nevada and have not been reviewed or endorsed by the operators of the projects.

Example Economics of a Royalty (NSR or NPI) versus a Stream
The example below compares the relative value per ounce to FrancoNevada of an NSR, a stream or an NPI or WI. Assume for one ounce of gold, a sales price of $2,800, a “stream cost”1 of $400 per ounce and that the “all-in sustaining cost”2 of the mine is $1,484 per ounce.

Why we Measure “Royalty Ounces”

Franco-Nevada’s mining properties that have reported Mineral Resources and Mineral Reserves are tabulated in the Mineral Resources and Mineral Reserves section of this Asset Handbook. Unless otherwise noted in the Royalty Ounce calculation for each asset, the figures are tabulated based on the publicly disclosed reports of each operator for each property on a 100% basis. However, the tabulation does not provide a specific measure for Franco-Nevada’s interest in such Mineral Resources and Mineral Reserves for the following reasons:

  • Royalty and stream interests have different economics than an operator has for its stated Mineral Resources and Mineral Reserves. In addition, the economics differ between NSR, NPI and stream interests.
  • Some assets do not cover the entire property associated with the operator’s publicly reported figures.

To account for the above, we calculate “Royalty Ounces” to estimate the value attributable to Franco-Nevada due to our economic interest in the Mineral Resources and Mineral Reserves of our portfolio. The value of a Royalty Ounce is normalized to that of a gold NSR ounce.