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The Obelisk Gold Focus Fund serves as a specialized financier, to help fund production and extraction of gold. Gold Streaming is a mine-financing method that allows the mine to gain financing from the Obelisk Gold Focus Fund in exchange for a royalty payment called a “stream”. A stream is a commitment for either a certain number of ounces of gold per year or a certain percentage of production on an annual basis from the mine. This royalty payment gives the Obelisk Gold Focus Fund the right to buy streams of gold from the mine at a pre-determined discount from the current spot price. In turn, the Obelisk Gold Focus Fund will sell the gold at the LME spot price.
Gold Streaming is a financing method that is used throughout the world in the mining industry. Royal Gold, Wheaton Precious Metals and Franco-Nevada are some of the biggest names in the mining sector that focus heavily on streaming precious metals. This model allows streaming companies to generate revenue regardless of world prices and still come out profitable.
Royal Gold (Nasdaq: RGLD) with a market capitalization rate of USD5.859 billion is the 21st largest mining company in the world. Receiving royalties for the past 20 years on numerous gold mines, Royal Gold currently holds interests in 38 active mining operations with principal mines including Pueblo Viejo (Dominican Republic), Andacollomine (Chile), Peñasquito (Mexico), and Mount Milligan (Canada).
In 2004, Wheaton Precious Metals (NYSE: WPM), formerly known as Silver Wheaton, was the first to use the streaming model for funding mine production. With a current market capitalization of USD8.15 billion, the company has streaming agreements for silver and gold in high-quality mines around the world. Producing 19,801 ounces of silver from its top 4 mines (San Dimas and Peñasquito mines in Mexico and Antamina and Constancia mines in Peru), and 10,578 ounces from its other mines, Wheaton Precious Metals had net earnings of USD204,378,000 in 2016 from silver specifically.
Franco-Nevada (NYSE: FNV) was founded in 1983 as the world’s first gold royalty company. The 24th largest mining company in the world, Franco-Nevada has a market capitalization of USD14.143 billion with 71% of total revenue coming from North America. As the world’s largest and most successful gold royalty company, 76% of Franco-Nevada’s revenue consisted of gold in 2016.
Lower cost structure - royalty companies that focus on streaming generally have a lower overall cost structure than traditional mining companies. The majority of capital is allocated towards product and administrative costs rather than being deployed into exploration or operations, lowering their overall financial obligations to a given project.
Smaller staff base - work involved with streaming is administrative focused and does not require staff to be at the site of the mine, therefore they generally have a small staff base.
High revenue per employee ratio – high revenue to low staff count results in a high revenue to employee ratio.
Lower risk profile - the lessened demand in overhead capital, smaller employee count, and predictable costs, royalty companies have an overall lower risk profile.
Scalable - streaming is scalable as allocation is proportionate to a mine’s production. An increase in capacity leads to an increase in production and profits.
Diversificiation - royalty companies have agreements with multiple mines thereby diversifying their asset base. Mines individually can have variable output in production over a given period of time. By purchasing from a pool of mines the royalty company can help reduce fluctuations in supply.
Gold Streaming vs. Traditional Mining
Traditional mining companies focus on exploration and extraction, of which both are capital and labor intensive practices. These higher start up costs result in a higher risk profile. Alternatively, streaming companies do not require a large upfront investment into projects because they act as a financial intermediary rather than a primary investor. Streaming allows for the prefinancing of the extracted assets only upon delivery of the gold. Capital flows from the streaming company are for product only as opposed to for financing operations.
Investment into traditional mining companies are backed by the asset (gold) of the mine itself, research and development for processes and capital acquisitions. Investment into streaming companies are backed by the rights to the actual physical gold that has already been extracted and refined to a state for which it can then be sold.
Profits from traditional mining companies depend wholly on market prices for gold. Fluctuations in market prices directly impact the amount of profit or even loss that the company takes. On the other hand, streaming companies buy streams of gold at a fixed discount irrespective to the spot price, therefore their margins are uncorrelated to market price fluctuations.
The investments discussed in this website may not be suitable for all investors. Investors should make their own investment decisions based upon their own financial objectives and financial resources and, if in any doubt, should seek advice from an investment advisor. Past performance is not necessarily a guide to future performance, the value of investments and the income from them can go down as well as up.
Aventine is a global business with 10 offices in 7 countries and strategic operations in Canada, the Channel Islands, Asia and South America.
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