Introduction
A form of financing. In its simplest form the royalty company provides the mine operator with an upfront payment and in return receives a percentage of revenue generated from production at the mine (What Is a Royalty?, n.d.). Mining royalties are paid to the government and landowners for mineral extraction rights. These payments ensure that the wealth generated from natural resources benefits the country and its people. This article describes the different types of mining royalties.
The different types of royalties
There are several types of mining royalties, including: Ad valorem royalties, Unit-based royalties, Profit-based royalties, Hybrid systems.
Ad valorem royalties
Ad valorem royalty is an output based royalty that is levied as a percentage of the value of production of a mining project (Hogan, n.d.). It requires knowledge of the mineral’s value. This system can be simple to administer or complex, depending on how “value” is defined. The simple type of ad valorem calculations uses a measure of “realized value” based on customer invoices, while more complex methods may involve imputing a mineral value applied to an international reference price, measuring mineral content, or seeking the opinion of an independent appraiser (such as for diamonds). The imputed value is used after deducting defined costs such as transportation, insurance, and freight, etc (10172016123146MR.Pdf, n.d.).
Unit-based royalties
The unit-based royalty system or tonnage-based royalty is an output based royalty that is levied as a set charge per physical unit of production of a mining project. It is mostly applied to high-volume, low-value homogeneous minerals. This system provides a stable and continuous revenue flow to governments and is relatively easy to administer. The royalty on a tonnage basis is also simple to determine (10172016123146MR.Pdf, n.d.).
Profit-based royalties
The third royalty system, widely used in developed countries, is the profit-based royalty assessment. This system is detailed, reflecting all revenues and costs, including capital and recurring operating costs, to determine the resulting profits of mining companies. Global companies prefer this method because it is based on the ability to pay, allows for early investment recovery, responds to market downturns, does not distort production decisions (such as cut-off grade or mine life), and does not significantly add to operating costs. Investors generally favor tax systems with high levels of transparency. This method can generate high long-term tax revenues and meet most investor criteria (10172016123146MR.Pdf, n.d.).
Hybrid systems
The Hybrid Royalty System in mining combines elements of different royalty structures, typically blending unit-based, ad valorem, and profit-based methods to create a balanced approach to taxation. This approach ensures steady revenue for governments even if prices drop, captures windfall profits when commodity prices rise, reduces financial burden on companies during downturns, encourages investment by balancing government take with industry profitability.
Conclusion
Mining royalties impact operations, governments, and communities in significant ways. For mining companies, they add to operating costs, influencing investment decisions and production strategies. Governments rely on royalties as a stable revenue source to fund infrastructure, public services, and economic programs, but high rates can deter investment. Communities benefit when royalties are used for local development, job creation, and social services, but poor management can limit these benefits. A well-balanced royalty system ensures sustainable mining practices while maintaining economic growth. Striking the right balance is key to maximizing resource benefits for all stakeholders.
Reference
10172016123146MR.pdf. (n.d.). Retrieved March 12, 2025, from https://ibm.gov.in/writereaddata/files/10172016123146MR.pdf
Hogan, L. (n.d.). INTERNATIONAL MINERALS TAXATION: EXPERIENCE AND ISSUES.
What is a royalty? (n.d.). Ecora Resources PLC (LSE: ECOR). Retrieved March 12, 2025, from https://www.ecora-resources.com/investing-ecora/royalties-and-streams-explained/
