Net Smelter Return (NSR) is the net revenue that the owner of a mining property receives from the sale of the mine's metal/non metal products less transportation and
refining costs. As a
royalty
Royalty may refer to:
* Any individual monarch, such as a king, queen, emperor, empress, etc.
* Royal family, the immediate family of a king or queen regnant, and sometimes his or her extended family
* Royalty payment for use of such things as int ...
it refers to the fraction of net smelter return that a mine operator is obligated to pay the owner of the royalty agreement. The royalty is paid in variable or fixed payments based on sales revenue received by a mining operator in return for mining output. It is contingent only on the sales price and quantity of product sold.
The term is named so due to the fact most of the time, mining output sold requires further processing by
smelters; the mining products purchased directly by smelters are sold to them for a discounted (net) price based on how much further processing is needed. The mining lease specifies the selling price (prices are different in
spot
Spot or SPOT may refer to:
Places
* Spot, North Carolina, a community in the United States
* The Spot, New South Wales, a locality in Sydney, Australia
* South Pole Traverse, sometimes called the South Pole Overland Traverse
People
* Spot (prod ...
and
forward market
The forward market is the informal over-the-counter financial market by which contracts for future delivery are entered into. It is mainly used for trading in foreign currencies, where the contracts are used to hedge against foreign exchange ris ...
s) and is used to verify the exact amount of product that's produced and sold between royalty payments.
One advantage NSR royalties have over other royalties is that usually, payments are higher in the short term because capital costs and exploration costs cannot be used as deductions (some royalties don't have to be paid until after other costs such as loans/amortization are taken care of). Also, mine life and royalty expiration dates need to be taken into consideration. The royalty can be called a Net Value Royalty when deductions are based solely on the contract.
[
Alternatively the Gross Smelter Return is a percentage of gross revenue paid by mine owner that isn't subject to any deductions.][
]
Examples of transactions involving net smelter return royalties
*Franco-Nevada
Franco-Nevada Corporation is a Toronto, Ontario, Canada-based, gold-focused royalty and streaming company with a diversified portfolio of cash-flow producing assets. It is traded on the Toronto Stock Exchange and New York Stock Exchange.
The ''O ...
's 7.29% NSR royalty on Newmont Mining's Gold Quarry open pit mine in Nevada, which cost the company US$103.5 million, realized $250 million in royalty payments before being acquired. The NSM royalty in this case gave Franco Nevada the option of collecting in cash or in-kind (metal product output).
References
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Energy economics