Royalty Arrangements – Risk Mitigation Considerations for Operators

Royalty arrangements are an important and increasingly common aspect of the mining world. Royalty interests are often offered by mining operators to entice early-stage investors, or sought out as a source of financing where more traditional financing is unavailable. Their popularity has led in recent years to the emergence of royalty and streaming companies, whose main business purpose is to acquire and hold mineral royalties.

Despite their common use, however, royalties are often granted as a small part of a larger commercial deal and usually in respect of pre-production assets. As a result, while negotiating parties always focus on the financial aspects of a royalty arrangement, less attention might be paid to the legal “nuts and bolts” of the agreement itself. In addition, once an agreement is executed and filed away, the asset or operator may be sold to a third party (sometimes multiple times) and the royalty obligation is forgotten – until the day when the asset goes into production and the royalty holder shows up seeking payment.

There are a number of steps that mining operators can take to avoid facing such unexpected liabilities – or, if confronted with a royalty claim, mitigate their exposure:

• Define the royalty interest precisely. Operators who are negotiating royalty agreements should be clear about what property and mineral interests the royalty attaches to, and how the royalty is to be calculated. Operators who are looking to acquire assets should review any relevant royalty agreements as part of their due diligence and determine whether the royalty interest forms an interest in land that will “run with the land”.

• Conduct periodic royalty audits to take stock of contingent royalty liabilities, determine whether any of those liabilities are set to “go live” as a result of an asset going into production, and (in relevant jurisdictions) whether any royalty or mineral claims might be set to expire.

• If a royalty holder seeking payment has acquired its royalty interest from another party, determine whether the royalty agreement requires the royalty holder to provide notice of transfers or assignments and, if so, whether notice was provided in accordance with the agreement. If it was not, the operator may have a defence against payment.

In circumstances where a royalty holder emerges and seeks payment on an asset that has been in production for some time, consider limitation issues. While the operator may have reporting obligations under the royalty agreement, if it was publicly known that an asset has been producing, the royalty holder may be precluded from recovering royalties on historic production.