Net smelter return
Encyclopedia
Net Smelter Return is the gross revenue (total revenue minus production costs) that the owner of a mining property receives from the sale of the mine's metal/non metal products less transportation and refining
costs. As a royalty
it refers to the fraction of net smelter return that a mine operator is obligated to pay the owner of the royalty agreement. The royalty is paid in variable or fixed payments based on sales revenue received by a mining operator in return for mining output. It is contingent only on the sales price and quantity of product sold.
The term is named so due to the fact most of the time, mining output sold requires further processing by smelters; the mining products purchased directly by smelters are sold to them for a discounted (net) price based on how much further processing is needed. The mining lease specifies the selling price (prices are different in spot
and forward markets
) and is used to verify the exact amount of product that's produced and sold between royalty payments.
One advantage NSR royalties have over other royalties is that usually, payments are higher in the short term because capital costs and exploration costs can't be used as deductions (some royalties don't have to be paid until after other costs such as loans/ammortization are taken care of). Also, mine life and royalty expiration dates need to be taken into consideration. The royalty can be called a Net Value Royalty when deductions are based solely on the contract.
Alternatively the Gross Smelter Return is a percentage of gross revenue paid by mine owner that isn't subject to any deductions.
Refining
Refining is the process of purification of a substance or a form. The term is usually used of a natural resource that is almost in a usable form, but which is more useful in its pure form. For instance, most types of natural petroleum will burn straight from the ground, but it will burn poorly...
costs. As a royalty
Royalties
Royalties are usage-based payments made by one party to another for the right to ongoing use of an asset, sometimes an intellectual property...
it refers to the fraction of net smelter return that a mine operator is obligated to pay the owner of the royalty agreement. The royalty is paid in variable or fixed payments based on sales revenue received by a mining operator in return for mining output. It is contingent only on the sales price and quantity of product sold.
The term is named so due to the fact most of the time, mining output sold requires further processing by smelters; the mining products purchased directly by smelters are sold to them for a discounted (net) price based on how much further processing is needed. The mining lease specifies the selling price (prices are different in spot
Spot market
The spot market or cash market is a public financial market, in which financial instruments or commodities are traded for immediate delivery. It contrasts with a futures market in which delivery is due at a later date...
and forward markets
Forward market
The forward market is the over-the-counter financial market in contracts for future delivery, so called forward contracts. Forward contracts are personalized between parties The forward market is the over-the-counter financial market in contracts for future delivery, so called forward contracts. ...
) and is used to verify the exact amount of product that's produced and sold between royalty payments.
One advantage NSR royalties have over other royalties is that usually, payments are higher in the short term because capital costs and exploration costs can't be used as deductions (some royalties don't have to be paid until after other costs such as loans/ammortization are taken care of). Also, mine life and royalty expiration dates need to be taken into consideration. The royalty can be called a Net Value Royalty when deductions are based solely on the contract.
Alternatively the Gross Smelter Return is a percentage of gross revenue paid by mine owner that isn't subject to any deductions.
Examples of transactions involving net smelter return royalties
- Franco-NevadaFranco-NevadaFranco-Nevada Corporation is a Canadian company that owns royalties in gold mining and other commodity and natural resource investments. It is traded on the Toronto Stock Exchange and NYSE Arca stock exchange....
's 7.29% NSR royalty on Newmont MiningNewmont MiningNewmont Mining Corporation , based in Denver, Colorado, USA, is one of the world's largest producers of gold, with active mines in Nevada, Indonesia, Australia, New Zealand, Ghana and Peru. Holdings include Santa Fe Gold, Battle Mountain Gold, Normandy Mining, Franco-Nevada Corp and Fronteer Gold...
's Gold Quarry open pit mine in Nevada, which cost the company US$103.5 million, realized $250 million in royalty payments before being acquired. The NSM royalty in this case gave Franco Nevada the option of collecting in cash or in-kind (metal product output). - Royal GoldRoyal GoldRoyal Gold is a precious metals company with royalty claims on gold, silver, copper, lead and zinc at mines in over 20 countries...
paid Seabridge GoldSeabridge GoldSeabridge Gold is a Toronto-based North American resource exploration company. It owns Kerr-Sulphurates-Mitchell, a copper-gold-silver-molybdenum porphyry project in northern British Columbia. The deposit's proven-probable reserves includes 38.5 million ounces of gold, 214 million ounces of...
C$160 million for a 2% NSR royalty on British Columbia's KSM gold-copper porphyry project; The deal boosted investor confidence in Seabridge Gold because it showed that Royal Gold believes that the mine will be profitable a feat considering it has capital costs of over $4.6 billion.