The Best Commodity Play Is Mining Royalty Investment Companies

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During his recent interview on The Acquirers Podcast with Tobias, Spencer Cole, CIO at Vox Royalty discussed Why The Best Commodity Play Is Mining Royalty Investment Companies. Here’s an excerpt from the interview:

Tobias: You’re the CIO of Vox Royalty, which is a really interesting play on this thing, because you don’t have the investment of a traditional miner, but you have some of the advantage of the upside. If any of those commodities start to run, you’ll do quite well. What’s the history of royalty investing, and how do you find yourself in this position?

Spencer: Sure. It’s a niche industry, Toby, that has grown on steroids over the past 20 years. Some of the first royalty deals ever done were back in the mid-1980s. The most famous royalty deal in history was actually a company called Franco-Nevada that really– they’re the grandfathers of the whole industry. In 1986, they saw a small ad in a local newspaper in Elko in Nevada, that a salty old prospector was selling a gold royalty. They ended up buying that royalty for $2 million.

Now, fast forward to today, that was in 1986, that royalty they bought for $2 million has generated over a billion dollars of revenue to them, and the net present value of the future royalty revenue is still north of a billion dollars.

Tobias: Oh, wow.

Spencer: That $10 million investment from that salty prospector, that’s become one of the world’s largest gold mines. They’ve mined in excess of 50 million ounces of gold. I guess that shows you the leverage that you can get when you make the right investments in mining royalties. Since that fateful investment in 1986, the industry really caught fire about 20 years ago. In the last 20 years, it’s gone from basically a $2 billion industry that had basically four or five players, today, it’s a $70 billion industry with 30 listed mining royalty investment companies. It’s been the best way to play commodities across any asset class compared to mining companies, indices, equity indices, or actually the physical metal itself. Royalty companies have outperformed all of those commodity-linked benchmarks for the last 20 years.

Tobias: Why do you think that is?

Spencer: I think the key reason is that a royalty, and by extension, a royalty investment company gives you all of the upside that a mining company gives you. Exploration success, when you find the new bonanza gold deposit. Production increase, when they increase production, therefore, revenue. Also, price upside. As commodity prices run particularly in an inflation environment that we find ourselves in today, royalties give you all of that upside. But importantly, you’ve got capped downside, because with a royalty, your first investment in is your last dollar in. You’re not exposed to operating costs, capital cost overruns when you’re building a mine, which often happens. You’ve got none of that downside that mining companies typically have and all of the upside that mining companies offer you. So, I think it’s an asymmetric leverage that royalty companies, that causes them to outperform.

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