TM Editors Note: This article discusses a penny stock and/or microcap. Such stocks are easily manipulated; do your own careful due diligence.
Royalty and streaming companies have received plenty of attention from investors over the past decade and for good reason. Their business model is in many ways superior to that of a mining company. By paying an upfront fee for a percentage of mine production, they get a steady flow of cash or metals, upside potential from new discoveries, upside potential from rising metals prices and downside protection with fixed costs. The benefits include:
1) Diversification – A streaming company has agreements with multiple miners, thus spreading and mitigating any potential risk. The larger companies have dozens of deals and multiple streams of income.
2) Unlimited Upside Potential – Since the deals they secure are usually for a percentage of the mine’s production for life, the streaming company stands to benefit immensely if new zones are discovered and actual production comes in higher than originally forecasted. This occurs all of the time in the industry, as drilling delineates new resources, either increasing annual production or vastly extending the life of the mine.
3) Limited Downside Risk – While a miner may see profit margins squeezed as the cost of production rises, the streaming company typically has a contract for a percentage of the gold/silver production, thus eliminating the issue of rising costs. Royalties are paid out of top-line revenue before any operating expenses are accounted for. In addition, the contracts usually contain a number of provisions protecting the streaming company in the event of fraud, misrepresentation, etc. This is all on top of the considerable due diliegence that is exercised before entering into any streaming deal.
4) Favorable Tax Treatment – Streamers enjoy a favorable tax situation courtesy of the Canadian Government. As long as they reinvest their proceeds or pay it out as dividends, they are gifted with a tax rate in the neighborhood of 0-8%. That’s a huge advantage when it comes to net profit margin.
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