Tuesday, March 11, 2014

Mineral Rights Royalties (Part 2)



In my previous post on this topic I introduced you to some very basic concepts regarding mineral rights. Now I'll be addressing the essence of what a mineral royalty is and covering the first major mineral royalty type.

Essentially, a royalty is a payment that a mining lessee or "operator" pays a mineral rights owner (you hopefully) for the right to explore, prospect, develop, or mine economically viable mineral or metal deposits on your property. It's very important to remember here again that you MUST own the mineral rights (not simply surface rights) in order to get a valid royalty deal. Again, I'm no expert on mineral rights issues or the fine points of royalty deals, so if you decide to head down this path make sure you consult with a licensed professional (certified mineral appraiser, property rights lawyer, geologist, mining engineer, etc.) who DOES know the score.

1. Flat-Rate Royalty

Also known as the flat-rate unit of production royalty, this type of royalty is one of the simplest to understand and deal with in a practical sense. In a flat-rate royalty deal you are paid a fixed amount by the operator per unit mined, produced, or recovered. Unit royalties can be paid in tons, pounds, troy ounces, grams, or anything else that you and the operator agree upon beforehand.

The single most important factor in a flat-rate royalty deal is that you get an accurate count of the units produced or sold by the operator over a set period of time. As you can see, for small timers like you and I this means a certain amount of trust is involved between you and the operator unless you personally monitor production yourself 24-7. That's unrealistic of course.

What can be done, however, is that on the front end of a flat-rate royalty deal you can stipulate that both electronic (digital) and hard-copy (paper) production accounting records be maintained from beginning to end. Some operators may balk at this sort of scrutiny and that should tell you something...A reputable lessee or operator might flinch at the pain-in-the-ass aspects of this sort of record keeping but won't bat an eye when it comes to providing you with the info you request, even in triplicate. However, you still need to understand that a flat-rate royalty based on units of production still has its inherent accounting problems even under the best of circumstances.

(Don't make a royalty move without consulting licensed professionals first.)

One good thing to remember is that flat-rate royalty deals rarely take into account fluctuations in the mineral or metals markets or a devalued dollar in times of recession or, worse yet, inflation. That means if the overall market price of the mineral or metal on your property drops one month into your flat-rate deal, then you'll see a correlating drop in your unit royalty payments. Ditto regarding hard economic times and periods of increased production costs (high fuel prices, transport, etc.). Another consideration here is that certain flat-rate royalty deals include a "cap" provision. Once this pre-set cap or limit is reached, the operator no longer has to pay you royalty payments any longer and can proceed independently while you just stand around and watch.

Flat-rate royalty deals have declined in popularity over the past 20 years or so. The main reason is, again, the fact that flat-rates don't typically account for changing prices and economic conditions. Although they do occur with precious metal deposits at certain times, most flat rate royalties are associated with recovering more mundane minerals or materials such as gravel, stone, and the like. It should go without saying that gold claim or other mineral rights property owners looking to make some royalty money should probably bypass the flat-rate type of deal.

Still, it's good to know your full-range of options just the same.

(c) Jim Rocha (J.R.) 2014

Questions? E-mail me at jr872vt90@yahoo.com

2 comments:

  1. Hello JR, Quite some time ago, I heard about an oil well being drilled at an angle to get under private property. I wondered at the time just how the mineral rights on that would work. Say you own 5 acres of ground, do the mineral rights go 100 yards deep,5 acres deep, 1/2 mile or clear to the core of the Earth? If you tell them "No you can't drill" and they drill under at an angle, would that be stealing?

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  2. Gary, I can't answer that question for you (and it's a good one). You'd have to get in touch with a professional who deals in mineral rights/rights royalties. Best, J.R.

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