Royalties v Shareholding

Royal Bafokeng’s secret sauce was converting Royalties into Equity

By Tshepo Magagane

At the very base, Equity gives you:

1. Strategic Input

2. Operational Influence

3. Most importantly CURRENCY – which enables the ability to transact

4. When it comes to the argument that NI can be manipulated by companies; that is the role of the Tax Authority

5. There are instances whereby they shareholding is too small to have 1 & 2 & 3 and a royalty conversion can be negotiated (especially if further capital calls will no be met)

6. However, if in a growth sector, at a sizeable minority stake, Equity makes sense

The illustration is holding a 2% Royalty v a 20% stake in a mine with a 20yr LoM and Scenario 2 is when prices move up.

Holding a Royalty stake v a 20% shareholding results in a USD25m value leakage and USD49m in Scenario 2 – for Illustrative Purposes – proving that the Royal Bafokeng Royalty to Equity conversion was the right approach (and this excludes the Value accretion from holding the Equity for Currency/Transacting purposes).

Recap on what I would put in the discussion documents: have done this in so many iterations😮‍💨😮‍💨 Profitability is the one that gets to to Enterprise Value🤞🏽🤞🏽

1. Commodity price based (royalty)
+ Factor independent of management decisions
+ Assessed on a yearly basis
+ Can be applied to a long time period

– Most volatile factor
– May be difficult in practice to establish formula linking commodity prices to enterprise value (consider fixed amounts when some thresholds are reached?)

2. Revenue based
+ Easy to compute. Will limit debate on determination

– Related to management decisions, in particular production levels (which in turns depend on capex)
– Definition of revenues can be unprecise: CIF vs FOB, discounts and handling charges
– May be difficult in practice to establish formula linking revenues to enterprise value (consider fixed amounts when some thresholds are reached?)

3. Profitability based
+ Most accurate translation of financial performance and enterprise value

– Related to management decisions
– Usually creates a debate over computation of earnings