Stocks in mining royalty companies are expected to continue outperforming metal producers in the coming years as macroeconomic uncertainty weighs on metals and mining equities.

Mining stocks slumped in 2023 due in part to lower commodity prices, recession fears, elevated interest rates and high inflation. But it is a different story for mining royalty stocks, which continued to shine despite the gloomy market.

A custom index comprising 14 royalty and streaming companies outperformed the broader S&P Global BMI Metals & Mining Index by 25.1 percentage points over the past five years, according to an analysis of S&P Global Market Intelligence data.

Mining royalty companies provide exposure to the sector without the cost and jurisdictional risks that miners have traditionally faced, making them a safe haven for investors looking to navigate a turbulent market, industry executives and experts told S&P Global Commodity Insights.

"Royalty and streaming companies have a proven business model, which provides investors with relatively lower risk exposure ... versus their producer counterparts," Shaun Usmar, founder and CEO of Toronto-listed Triple Flag Precious Metals Corp., said in an emailed statement to Commodity Insights.

"As a result, royalty and streaming companies often trade at premium valuations across different metrics," Usmar added.

Triple Flag's royalty portfolio includes the Northparkes copper-gold mine in Australia, the polymetallic Cerro Lindo mine in Peru and the Royal Bafokeng Platinum Ltd. platinum group metals operations in South Africa.

Diversification is key

Diversified portfolios have helped royalty companies reduce exposure to volatility and uncertainty compared to miners. Royalty companies usually own interests in several mines across different regions. They also usually invest in projects and operations that have proven track records.

"Royalty companies tend to have royalties on several mines as these can be acquired more readily compared to direct ownerships, so they can spread out their investments more," Wilhelm Perez, an analyst with Commodity Insights' Metals and Mining Research team, said in an email.

In contrast, mining companies are usually focused on a couple of flagship projects that they may need to build from scratch, exposing them to risk linked to various issues including rising costs driven by inflation.

Varying government policies worldwide have also impacted miners' operations and project development. Some projects have benefitted from efforts by the US and its allies to reduce reliance on China for critical minerals, while others have dealt with public backlash, tighter state control and other geopolitical issues.

"A royalty portfolio ... mitigates jurisdictional risk by being spread across the globe, as well as spread across multiple operators and commodities," Trident Royalties PLC CEO Adam Davidson said in an email.

"Through one single shareholding, investors gain wide exposure to the sector via an instrument which is inherently protected from cost inflation at the operational level," Davidson added.

Trident owns 21 metals and mining royalty assets across the globe including on the Thacker Pass lithium project in Nevada and the Sonora lithium project in Mexico.

Some royalty companies also own multiyear streaming agreements with mines that include predetermined prices, protecting them from price swings.

"This may have also contributed positively to their performance despite price fluctuations in the past years," Perez said.

Smaller market cap a factor?

A key factor behind royalty equities outperforming mining stocks could be that their market capitalizations are significantly smaller than the valuations of the top producers, said Paul Manalo, an analyst with Commodity Insights' Metals and Mining Research team.

"We can always expect larger swings (positive and negative) with smaller players compared to larger players," Manalo said in an email.

Franco-Nevada Corp. had a market capitalization of $22.62 billion as of Dec. 20, making it the largest mining royalty company by valuation. But the company's market cap was only about 14.4% of the $157.26 billion valuation of BHP Group Ltd., the largest miner by market cap. As of late afternoon on Dec. 27, Franco-Nevada's market cap was $21.63 billion, and BHP Group's market cap was $174.41 billion.

Wheaton Precious Metals Corp., Franco-Nevada's closest rival, had a market cap of $20.76 billion as of Dec. 20, or just about 17.7% of the $117.24 billion market value of Rio Tinto Group, BHP's closest rival. Wheaton Precious' market cap was $22.87 billion as of late Dec. 27, and Rio Tinto's market cap was $127.5 billion.

Wheaton owns metal streams for 34 assets including a gold stream on the Salobo mine in Brazil and a silver stream on the Penasquito mine in Mexico.

Franco-Nevada's portfolio comprises 419 assets, which makes it the "largest and most diversified portfolio of cash flow-producing assets" in the royalty space, according to the company's website.

Miners may still hold the edge in terms of potential investment rewards.

"I would treat royalty companies as low-risk, low-reward investments while mining companies are the opposite," Perez said.

Unique opportunity

Royalty company executives remain confident about the industry despite an uncertain economic outlook in 2024.

Lithium Royalty Corp. will continue to benefit from rising demand for electric vehicles driven by the ongoing energy transition, said Jonida Zaganjori, the company's vice president of investor relations. Lithium Royalty's portfolio comprises 34 assets including the Mt Cattlin operation in Western Australia.

"Despite the macroeconomic uncertainty in the near term, EV sales are still growing at multiples of GDP and higher than overall passenger vehicle sales," Zaganjori said in an email. "In the long term, the prospects for electric vehicle sales and lithium remain robust."

The high-interest environment and a weak equity market may also provide an opportunity for royalty companies to provide more favorable financing to producers, enhancing returns for royalty shareholders.

"This places our sector, and Triple Flag specifically, in a unique position to provide flexible financing that is patient and partnership-focused compared to traditional sources such as debt and equity," Usmar said.

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