The General Problem
Royalty agreements in the mining industry are ubiquitous in property transactions.
The FMV of royalties, buyback options and streaming agreements is contingent on numerous uncertain and imprecise inputs in addition to the commodity price:
- Future planned production profile by period
- Probabilities of production survival across successive periods
- Appropriate discount factors for payment streams, given uncertain risks
- Appreciation/depreciation of commodity prices and their associated volatilities
Inability to estimate FMV analytically has led to numerous ad hoc pricing methods involving point estimates
Royalty buybacks are often viewed merely as upside insurance and/or deal sweeteners, with no accurate accounting by either party for the premium value of the buyback option vs. time
Does This Sound Familiar
The Example Problem
The Solution
- Seller X retains a 1% royalty on future production from a property sold to Buyer Y
- Buyer Y has a 5-year option to buyback a fraction of this royalty for a specified price of $5 million
- If the buyback price is $5 million for one-half of the 1% royalty, the royalty itself is often deemed to have a “notional” value of $10 million
- This is faulty accounting! The FMV of a royalty stands alone from the value of any associated buyback option
- The FMV of the buyback option premium is a derivative of the royalty value, not vice versa, and depends upon additional non-property related inputs (e.g., volatility)
What We Do
The Solution. ROSAVAL™
RSA provides a rigorous system for estimating the uncertainty distribution of the FMV of royalties, buyback options and streaming agreements
This distribution can be analytically reduced to an interval range, and thence to a scalar value equal to the midpoint of this range
Our system uses extremely fast, non-Monte Carlo calculation methods that incorporate all uncertainties and imprecise knowledge of numerous input factors
The calculation engine combines human expert inputs with fuzzy systems theory to deliver a reliable evaluation of FMV in the presence of uncertainty and imprecision
The rapid computational capability enables what-if scenario analysis on the spot under different input assumptions