Behind the deal with Jim Sikora: Metals and Mining Royalties

Q: To start off with the recent transaction, why do we look to invest in mining royalties?

We started this program approximately eight years ago. It has been quite successful for Teachers’ – we have generated strong returns over that time, exceeding our benchmarks and it’s a priority area for further investment.  

The idea behind looking at mining royalties came about as a way to diversify our natural resources portfolio, which at the time was heavily weighted to energy, and have these assets play a larger role in the Teachers’ all-weather portfolio. 

With royalties, in periods of rising commodity prices – whether that’s due to robust economic growth or even supply disruptions – they will typically deliver increasing cash flows. At the same time, if the economy is weaker, the long-term nature of these assets and their ongoing top line revenue streams can provide stability. This makes royalties effective diversifiers, inflation hedges and a good match for a pension plan with inflation-linked liabilities that needs a balance of assets able to perform in any environment.

For our portfolio, there are four classes of metals that we are actively looking for exposure to: precious metals (e.g., gold and silver), base metals (e.g., copper and nickel), battery metals (e.g., lithium), and industrial minerals (e.g., salt, soda ash).

Q: How has the approach to these types of transactions evolved over time?

Royalty structures are attractive to global investors because of the diversification that they offer as well as the potential for cash flow growth if a producing mine expands its resources. This upside optionality is largely why, from when we started our program to now, we have seen the competitiveness rise for these types of transactions. 

To comment on our own strategy, we have evolved our approach over time. And what we have been looking for and focused on is finding a path that can earn us a strong return, manage downside risks, and retain commodity exposure all while meeting the financing needs of the operator more efficiently.  In our recent Australian transaction, it was entirely a royalty package, but it doesn’t need to be for us to meet our goals.  We are also comfortable providing credit and taking an equity position in a company in addition to buying a royalty. By taking on a bit more operational and financial exposure upfront, for example, we were able to position ourselves for a potentially greater overall return once the royalty kicks in. Offering a cross-capital structure solution for an operator is a great way to gain access and differentiate ourselves versus being in a crowded auction and competing solely on price.

Q: Does the Australian transaction represent a one-off opportunity or is it part of a broader strategy to increase exposure to critical minerals as these markets mature and global competition for supply intensifies?

Our latest transaction in Australia was quite unique as it provided us with a diversified metals portfolio. Generally, you’re gaining exposure to a single commodity but, in our case, we have taken on a package of critical minerals with some producing mines and some in earlier stages.

As we think about where we are expecting to see strong demand over the long term, lithium is a commodity that certainly comes to mind. We see automotive companies, technology firms, governments, and other investors all recognizing how vital lithium and other battery materials are and looking to secure future supply. Having a strategy that lets us tap into critical minerals where we see good long-term fundamentals will provide strong upside.