A royalty is a contractual agreement under which the royalty company provides a once off upfront payment to the mining company, in exchange for the right to receive a defined percentage of the returns from the mining operation once in production. The percentage of returns is typically charged on the revenue; however, royalties can take several forms. Some of the most common royalties are described below.
Types of royalties:
- Gross Proceeds Royalty (GPR): A fixed percentage of the total revenue of a resource extraction operation, before any deductions (such as production, operating, and capital costs, taxes and interest).
- Net Profits Interest (NPI) Royalty: A fixed percentage of the gross revenue from a resource extraction operation, after all the costs (such as exploration, development, production, capital costs, and interest) are deducted.
- Net Smelter Return (NSR) Royalty: A fixed percentage of the revenue of a resource extraction operation, after all incidental transportation, insurance, refining and smelting costs are deducted.