In Investors’ View, Royalties Are Earning Royalties

In Investors’ View, Royalties Are Earning Royalties

ADELAIDE, Australia – Too many royalty deals on resource projects are drawing attention to an asset few investors even knew about.

Rising commodity prices helped companies including South32 Ltd.

Glencore PLC and Rio Tinto PLC raise hundreds of millions of dollars from royalty sales that have long been on the balance sheets but overshadowed by their massive mining operations.

Royalty owners receive a share of the revenue from a mine or oil field, in exchange for an initial investment or as part of an agreement, without having to run the operations. As a result of past investment and booming markets, global producers have many royalties on their balance sheets that they believe are undervalued by the market.

South32, led by CEO Graham Kerr, recently sold a package of four base metal royalties for about $200 million in cash and stock.


Photo:

Carla Gottgens/Bloomberg News

That is changing as specialist royalty companies tap into a forecast boom for metals such as copper seen as essential to a global energy transition or gold as a hedge against inflation.

Activity in the energy sector is also increasing. Site Royalties Corp.

and Brigham Minerals Inc.

—which have made substantial acquisitions in the oil-rich Permian Basin of West Texas and New Mexico this year—said this month they had agreed to combine to become one of the largest-traded minerals and royalty companies publicly in the US.

South32 recently sold a package of four base metal royalties to London-based royalties and streaming company Anglo Pacific Group PLC for about $200 million in cash and stock. The royalties related to a mix of mines and projects owned by copper and nickel companies in the US, Australia and Chile.

“To be honest, these were royalties that probably 99% of our investors didn’t know we had, and didn’t value,” said South32 CEO Graham Kerr.

The Australia-based miner has another 36 royalties on its books, mostly for base metal projects, that it could sell.

‘To be honest, these were royalties that probably 99% of our investors didn’t know we had, and didn’t value at all.’


— Graham Kerr, chief executive of South32

Investors say valuing royalty assets held by big miners is a tough task, largely because these companies tend to keep a low profile. Matthew Haupt, lead portfolio manager at WAM Leaders Ltd., said South32 was known to have royalties, but it was not known how much or covering which mines.

“So we couldn’t put a lot of value because we didn’t really know the details,” said Mr. Haupt, whose fund oversees more than $1 billion in assets and owns South32 stock.

In July, Sandstorm Gold acquired a number of royalties held by BaseCore Metals LP, a joint venture between the Anglo-Swiss commodities company Glencore and the Ontario Teachers’ Pension Plan Board. Ltd.

for $525 million in cash and stock.

A month later, Rio Tinto sold its royalty on the Cortez gold mine in Nevada, which was owned by Barrick Gold Corp.

and Newmont Corp.

joint venture, and the nearby Fourmile project, which is solely owned by Barrick. He struck the deal with Denver-based Royal Gold Inc.

for $525 million in cash.

“This transaction unlocks hidden value from our portfolio and frees up cash immediately,” Peter Cunningham, Rio Tinto’s chief financial officer, said at the time.

Smaller companies were also active. Royalty Nova Canada Corp.

have agreements been signed this year for royalties on operations run by Lundin Mining Corp.

and Hudbay Minerals Inc.

Mining executives say strong commodity prices have fueled the flurry of deal activity. Prices for metals including copper hit significant highs earlier this year, partly due to supply concerns after Russia, a major metal producer, invaded Ukraine. Lately fears and anxieties about the Chinese economy have weighed on prices.

The timing of some deals is linked to operational milestones. Rio Tinto received the Cortez royalty when it sold its 40% stake in the operation to Barrick in 2008. The royalty was to start paying when the site had produced 15 million ounces of gold from 2008 onwards. That is expected to happen soon, Rio Tinto said.

Marc Bishop Lafleche, chief executive of Anglo Pacific, expects more miners to try to turn royalties and legacy streams into cash.

“The market doesn’t recognize value in royalties or streams in that context, not because there’s no value, but because they’re not illuminated on a day-to-day basis in the context of a substantial mining operation,” he said.

Competition for royalty assets is so fierce that there is a risk that interested buyers will be priced out of the market. One of them is Australia’s Deterra Royalties Ltd.

who owns a royalty on BHP Group Ltd’s iron ore operation. and has a mandate to buy more in bulk commodities, base metals and battery metals.

“We see a lot of opportunities in that space, but we haven’t seen the value to support the kind of pricing that’s needed to make them happen,” said Julian Andrews, Deterra’s chief executive.

Deterra is betting that rising interest rates will prompt more miners to set up new royalty arrangements to finance projects or acquisitions, as companies find it harder to raise capital in debt and equity markets.

“We think we’re getting more traction,” Mr Andrews said.

Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com

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