Overlooked by Investors, Royalties Are Fetching Princely Sums

ADELAIDE, Australia—A rush of deals for royalties on resources projects is drawing attention to an asset that many investors didn’t even know about.

Elevated commodity prices have helped companies including South32 Ltd.

Glencore PLC and Rio Tinto PLC raise hundreds of millions of dollars from sales of royalties that had long been on the balance sheets but were overshadowed by their vast mining operations.

Owners of royalties get a share of revenue from a mine or oil field, in exchange for an initial investment or as part of a deal, without having to run the operations. A legacy of past investment and deal-making booms, global producers have dozens of royalties on their balance sheets that they believe aren’t valued by the market much.

South32, led by CEO Graham Kerr, recently sold a package of four base-metals royalties for roughly $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 that are viewed as essential to a global energy transition or gold that is a perceived hedge against inflation.

Activity has also been intensifying in the energy sector. Sitio 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 that they had agreed to combine to become one of the largest publicly traded mineral and royalty companies in the US

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

“To be perfectly honest, these were royalties that probably 99% of our investors didn’t know that we had, nor did they put any value on it,” South32 Chief Executive Graham Kerr said.

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

‘To be perfectly honest, these were royalties that probably 99% of our investors didn’t know that we had, nor did they put any value on it.’


— Graham Kerr, South32 chief executive

Investors say valuing royalty assets held by large miners is a tough task, in large part because those companies typically say little about them. Matthew Haupt, lead portfolio manager at WAM Leaders Ltd., said South32 was known to own royalties, but not how many or covering what mines.

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

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

for $525 million in cash and stock.

A month later, Rio Tinto sold a royalty it held on the Cortez gold mine in Nevada, owned by a Barrick Gold corp.

and Newmont corp.

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

for $525 million in cash.

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

Smaller companies have also been active. Canada’s Nova Royalty corp.

has this year signed agreements for royalties on operations run by Lundin Mining corp.

and Hudbay Minerals Inc.

Mining executives say strong commodity prices have encouraged the flurry of deal activity. Prices for metals including copper notched record highs earlier this year, partly because of supply concerns after Russia, a key metals producer, invaded Ukraine. Recession fears and concerns about China’s economy have weighed on prices more recently.

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

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

“The market doesn’t recognize value with royalties or streams in that context, not because there is no value, but because they are just not daylight in the context of a substantial mining operation,” he said.

Competition for royalty assets is proving so fierce that it risks pricing some interested buyers out of the market. One of them is Australia’s Deterra Royalties Ltd.

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

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

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

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

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

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Leave a Reply

Your email address will not be published. Required fields are marked *