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Webinar Royalty Deals in Brazil - Insights and Improvements (18/03/2021)
Veirano Advogados
Overview
This webinar focuses on royalty deals in the Brazilian mining sector, bringing together representatives from the National Mining Agency (ANM), the National Development Bank (BNDES), and international royalty companies. The discussion centers on a proposed resolution aimed at regulating the use of mineral rights as security for financing, with the goal of increasing legal security, transparency, and enforceability. Experts share insights on the benefits of royalty financing for mining companies, the different types of royalty agreements, the importance of a secondary market for royalties, and how these instruments interact with broader financing structures, including ESG considerations and inter-creditor agreements. The overarching aim is to foster capital raising and enhance the attractiveness of the Brazilian mining industry for investment.
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Chapters
- Capital raising is crucial for mining companies, and royalties offer an alternative financing method.
- Brazil has traditional royalty practices but needs more detailed information to highlight opportunities.
- A new resolution is being developed to regulate the use of mineral rights as security for financing, aiming for legal security, transparency, and enforceability.
- The resolution is based on public consultation and aims to improve regulations for capital raising in the Brazilian mining sector.
Understanding the evolving regulatory landscape for royalty deals is essential for mining companies seeking capital and for investors looking to finance projects in Brazil.
Public Consultation No. 3 of 2020 by the National Mining Agency, which proposed a draft resolution to regulate articles 43 and 44 of the Mining Code regarding mineral rights as security.
- The National Mining Agency (ANM) is working on a resolution to provide clarity and security for royalty agreements.
- The National Development Bank (BNDES) is reassessing its investment strategies to support more viable mining projects in Brazil.
- BNDES, as a major long-term financier, is experienced in traditional finance but is increasingly open to incorporating royalty instruments.
- BNDES requires clear registration processes for royalty dues attached to mineral rights to boost various financial agreements, including royalties.
- BNDES analyzes mineral rights for financing, seeking certificates of good standing and checking for liens or charges to assess risks to future revenues.
The involvement of regulatory bodies like ANM and financial institutions like BNDES is critical for establishing a robust and trustworthy framework for royalty financing in Brazil.
BNDES's experience includes participating in royalty deals during the privatization of companies in the 1990s, demonstrating a historical, albeit limited, engagement with royalty structures.
- Royalty companies like Royal Gold, Mavericks Metals, and Vox Royalty provide low-cost, long-term financing compared to traditional debt or equity.
- In exchange for capital, royalty holders receive a right to a percentage of future revenue or production for the life of the project.
- Royalty investments are high-risk, especially in early-stage projects, making security of rights crucial.
- Enhancements in legal security for royalty rights make the Brazilian mining industry more attractive to international investors.
- The flexibility of royalty and streaming agreements allows for tailored structures that align interests between the mining company and the financier.
Understanding the value proposition of royalty financing helps mining companies assess alternative capital-raising options and helps investors understand the unique benefits and risks involved.
Royal Gold holds royalties on projects like Amarillo's Mara Rosa project and Tristar's Castelo de Sonhos project in Brazil, illustrating their direct investment in the jurisdiction.
- There is no single standard royalty contract; agreements are flexible and tailored to specific projects.
- Common royalty types include Net Smelter Return (NSR), Gross Revenue Royalty (GRR), and Net Profits Interest (NPI).
- Metal streams, where a company purchases a percentage of metal output at a reduced price, are another form of financing distinct from royalties.
- In-kind payments or deliveries (e.g., actual gold) are possible options within royalty contracts, with streams being a prime example.
- The longevity and certainty of royalty arrangements, often for the life of the mine, are key attractions for financiers.
Familiarity with different royalty structures allows companies and investors to negotiate terms that best suit their financial and operational needs.
A Net Smelter Return (NSR) royalty grants the holder a percentage of revenue from the smelter, less specified deductions outlined in the contract.
- A secondary market exists where existing royalty interests can be bought and sold, providing liquidity to original holders.
- This secondary market increases the value of initial exploration and development work by allowing creators to retain future upside.
- Investing in royalty companies offers diversification across multiple projects, operators, commodities, and jurisdictions.
- Royalty companies provide exposure to commodity prices and mining sector growth without direct equity ownership in mining operations.
- Monetizing existing royalties allows mining companies to reinvest capital into new exploration or development projects.
The existence of a secondary market and the appeal of investing in specialized royalty companies enhance the overall ecosystem by providing liquidity and diversified investment opportunities.
Vox Royalty acquired a royalty in Brazil from an entity that then reinvested the proceeds into exploring other assets they held, demonstrating the capital recycling benefit.
- Inter-creditor agreements (ICAs) are crucial when multiple lenders have claims on a project's assets or revenues.
- BNDES is open to discussing ICAs involving royalty transactions, seeking equal participation in guarantees if conditions are similar.
- Royalty holders prioritize the continuation of their agreements and the ability to transfer or repurchase rights in case of insolvency.
- ESG (Environmental, Social, and Governance) factors are increasingly important, influencing investment decisions and project sustainability.
- BNDES is exploring linking long-term loans to ESG indicators to encourage better practices among mining companies.
Effectively managing inter-creditor relationships and integrating ESG principles are vital for securing comprehensive financing and ensuring the long-term sustainability and social license of mining projects.
BNDES is studying new project financing models that link loan terms to the achievement of specific ESG indicators, incentivizing companies to improve their environmental and social performance.
- Clearer regulations on royalty registration and security will make Brazil more attractive for international capital.
- Addressing potential tax and accounting implications of upfront royalty payments requires further regulation from federal revenue and the central bank.
- The proposed resolution aims to simplify administrative processes for registering royalty interests.
- Royalty companies view their relationships with mining operators as strategic partnerships with aligned interests.
- Government outreach to industry for comment on regulatory development is a positive step for the mining ecosystem.
Continued regulatory modernization and clear frameworks for royalty transactions are essential for unlocking Brazil's mining potential and attracting sustained investment.
The ANM's efforts to create a unified database for registering liens and charges on mineral rights will improve transparency and reduce the risk of 'hidden' royalties in transactions.
Key takeaways
- Royalty financing offers a flexible, often lower-cost alternative to traditional debt and equity for mining companies, providing capital without immediate equity dilution.
- International royalty companies seek enhanced legal security and transparency for their rights in Brazil to de-risk investments and offer more competitive financing.
- The proposed ANM resolution is a critical step towards formalizing and securing royalty agreements, making Brazil a more attractive jurisdiction for mining investment.
- Understanding the nuances of different royalty structures (NSR, GRR, NPI, streams) is key to negotiating effective financing packages.
- A robust secondary market for royalties provides liquidity and encourages further exploration and development by allowing original holders to monetize their interests.
- Effective inter-creditor agreements and a strong focus on ESG principles are essential for managing complex financing structures and ensuring project sustainability.
- Collaboration between government agencies (ANM, BNDES), royalty companies, and mining operators is vital for fostering a healthy and dynamic mining finance ecosystem.
Key terms
Royalty financingNet Smelter Return (NSR)Gross Revenue Royalty (GRR)Net Profits Interest (NPI)Metal StreamSecurity of TenureInter-creditor Agreement (ICA)National Mining Agency (ANM)National Development Bank (BNDES)ESG (Environmental, Social, and Governance)
Test your understanding
- How does royalty financing differ from traditional debt and equity financing for mining companies?
- What are the primary goals of the proposed resolution by the National Mining Agency regarding mineral rights?
- Why is the existence of a secondary market for royalties important for the mining ecosystem?
- How do ESG considerations influence the decision-making process for royalty companies and financial institutions like BNDES?
- What are the key challenges and opportunities for royalty companies operating in Brazil, considering its legal framework?