Historically, gold miners prioritised capital reinvestment to support exploration and expansion of current operations. The discovery of a new deposit or adding resources to an operating mine was celebrated and marketed greatly on companies’ websites. The level of exploration expenses undertaken by gold mining companies reflects their commitment to replenishing and expanding their resource base. Higher exploration expenses indicate an aggressive pursuit of new deposits, which may indicate a company’s confidence in its growth prospects. Conversely, reduced exploration expenses could suggest a focus on optimising existing operations or a cautious approach in uncertain market conditions. Lately, the lion’s share of exploration budgets has gone to brownfield exploration, leaving greenfield exploration mainly to junior to mid-tier miners. Things seem to have taken a turn over the last decade, as the focus now seems to be on acquiring new resources through M&A and attracting investors via higher dividend payments.
During a precious metals bull cycle, such as the one we saw during 2010 to 2012, exploration budgets usually grow. But during the last three years, exploration expenditure hasn’t been ticking up as expected. Another metric to consider is EBITDA, which reflects a company’s ability to generate revenue, control costs and manage operational efficiency. A rising EBITDA indicates improved operational performance, potentially leading to enhanced financial stability and the ability to fund growth initiatives. Performance since the pandemic has been historically high, fuelled by inter-operation synergies and cost-cutting strategies. Dividend payments have followed suit and have risen exponentially, surpassing the US$5 billion mark last year for the top 10 gold miners.
Enter the Streamers
During the last few years, interest in gold royalty and streaming companies has been steadily increasing. The origin of the royalty business model has been around for four decades already, aimed at investors wishing to gain exposure to the precious metals sector as an alternative investment, while also providing capital to mining companies in exchange of a percentage of the revenue generated from metal production. It was not until mid-2010 that the business also introduced the concept of streaming, in which agreements are put in place that allow the royalty company to purchase a portion of the produced gold at a predetermined price, which is usually pre-fixed and lower – often significantly – than market rates. The first royalties introduced on the precious metals market were mainly for gold. But during the last few years, the market has expanded into base metals, iron ore and energy-transition metals too.
The financial performance of royalty companies is driven by the success of the mines they invest in, rather than the direct exposure to the metal prices the mining companies experience. The rising interest in royalty companies follows several factors. From the mining industry’s perspective, in our goal of reaching the zero-carbon emission targets, a special focus on the metal supply chain has been growing, and as more mines are needed, financing is of paramount importance. Royalty companies can act as financiers without the need of issuing new debt, which tends to be the preferred choice when facing shareholders. On the other hand, from the investor’s perspective, royalty companies have been outperforming traditional mining companies during the last few years, while offering diversified exposure to multiple mining projects in different regions of the world, with limited exposure to the operational costs the mining companies incur. Could royalty and streaming companies then be successful in boosting the discovery of the so much-needed resources to battle mine depletion? As of now, there are over 500 – and growing – mines and projects using streaming and royalty deals. It might be too early to weigh the long-term effects of these agreements, but it is undeniable that we will be hearing more about this business model in the near future.