Mineral Rights Royalties (Part 3)
If you own the mineral rights to your property and that land or claim contains economically viable mineral or metal deposits, then this series of posts is for you. Today I'll be describing the ins and outs of another major type of mineral rights royalty, the gross or net smelter royalty.
Gross or Net Smelter Royalty (GNSR)
This type of royalty is pretty much straightforward and its name tells the tale. GNSR payments can be fixed or variable and the amount of those payments is based on either a specific quantity or a percentage of the amount of mineral or metal recovered and shipped from your claim or property. The real kicker in a GNSR deal is the fact that there is a three or four-tiered aspect to the whole thing.
1) First, there is you, the mineral rights owner. 2) Next comes the lessee or operator...the guy, gal, or company that you made a royalty deal with in the first place. This is where you are no longer directly involved because the operator must now either transport the minerals or metals recovered from your property 3) to a processor and/or 4) a refiner or smelter (if your royalty deal involves metals).
How You Get Paid
Here's where things can get tricky at times. Why? Because the operator is going to have to pay out of his or her own pocket for processing and smelting costs and will undoubtedly pass part of those costs along to you. Typically this is done on the front end because a savvy operator will have a pretty good idea of what operating, production, transporting, processing, and smelting costs will be involved in working your claim or property. Thus, these costs will be reflected to one degree or another in your royalty payments.
There are a couple of ways that both you and the operator get paid in a GNSR deal. One approach is to sell the recovered minerals or metals in bulk, as is, to the processor or refiner/smelter at a preset price based on a fixed unit amount of material produced. Alternately, the operator and processor/smelter can work a deal where a percentage is paid for the amount of material delivered. In this sort of approach the daily spot market price of a given mineral or metal is used as the payment basis and the percentage can be variable (up or down) which can either increase or decrease your royalty payments over time.
Should Dreams Come True
Just so you know, these sorts of decisions are usually based on operator knowledge and expectations, projected returns, and mineral/metals prices as well as the overall nature of the deposit(s) on or underneath your property. This latter topic needs addressing a bit here because no two mineral or metal deposits are the same. If the deposits on your claim or property are too difficult or too costly to reach or work there won't be any royalties coming your way. For example, no operator in his or her right mind is going to mess with highly refractory gold ores or thin, spotty paystreaks of placer gold buried under tons of overburden. UNLESS, of course, that operator thinks there's a profit to be made. Then caution is thrown to the winds and the digging will start regardless.
(You after selling your mineral rights.)
One other thing you should know here about GNSRs is that they're probably the best (and easiest) type of royalty to transfer or sale down the road. Let me give you an example. After signing a year-long contract with a certain operator and getting your royalties, you decide at the end of that year that you want to try another operator or company because you've been approached and offered a better royalty deal. Or, better yet, a huge mining concern is licking its chops over the minerals on your claim or property and is prepared to pay huge royalties by comparison, or may be even suggesting a buy out. Well, should such dreams come true, having a solid GNSR deal is probably the best of all royalty alternatives and gives you the greatest bargaining power.
There's more to come, so stay tuned.
(c) Jim Rocha (J.R.) 2014
Questions? E-mail me at email@example.com