?? Exploring Mineral Rights
Welcome to the Alts Sunday Edition
My name is Chrissy Kapralos, and this is my first issue with Alts. ??
I love investments I can physically touch — real estate, businesses, precious metals; you get the gist.
Brian's issue on Investing in Silver last week gave me a chance to explore the red tape behind actually accessing the world's natural resources and metals.
And that goes beyond silver and gold — we’re also talking about oil, which, love it or hate it, remains one of the most important commodities in the world. (Just ask Warren Buffet, the largest shareholder of Occidental Petroleum.)
But you can’t dig up a treasure chest of gold or oil without this administrative must-have: mineral rights — i.e., the permission to extract and exploit the assets underneath a property.
Today, I’ll explore mineral rights & royalties in the US and beyond, and how you can invest.
Let's go ??
Build value from the ground up ??
Phoenix Capital Group specializes oil, gas & mineral rights acquisition and investment.
Investors can purchase 9-13% annual interest bonds from Phoenix Capital Group. Interest is paid monthly, and compounding is available to maximize potential returns.
How it works:
Anyone in the US can invest. There are options for both accredited and non-accredited investors.
(There's currently a waitlist for non-accredited investors, but accredited folks can start with $25,000 minimum investments)
What are mineral rights?
Mineral rights let the owner dig and sell minerals underneath a property — solid minerals like gold and lithium, or liquid minerals like oil.
That piece of farmland you just bought in the US? You definitely have the surface rights, which speaks to everything on the ground (property, crops, sand, and gravel).
You probably own some of the airspace rights — at least up to a certain height. And if there's a river or lake on the property, you may have some water rights, too.
But the fact is, you can own a home or piece of land, and still not own the assets underneath it!
Only the title deed can tell you if you have the mineral rights. Even then, you should do title and deed research, and triple check with a property lawyer to ensure you truly own them.
Mineral rights are often passed down through inheritance, and it's common for younger heirs to claim legal rights to subterranean treasure that you didn't even know about.
Ownership disputes are fairly common, and lead to complex legal battles that can stretch for decades.
Mineral rights laws vary around the world
In the US, it’s common to obtain mineral rights when buying a property, as long as the previous owner hasn't sold off those mineral rights to someone else before you!
However, mineral rights are far from being an automatic right in every country.
Brazil, Germany, Colombia, Chile, Iraq, and Afghanistan are all countries where mineral rights are owned by the State, which then leases or temporarily grants those rights under contract to private companies and collects royalties. (Homeowners get zilch!)
Those royalties can reach as high as 40% in Chile. At the same time, nearby Argentina is more investor-friendly — they cap royalties on lithium production at 3%.
Canada is the world's 4th-largest gold producer (and 4th largest oil producer, for that matter) Here, the government does NOT recognize mineral rights as automatic for landowners.
For example, 81% of mineral rights in Alberta, Canada, are owned by the Crown (Canadian government). They lease mineral rights to mining and oil-operating companies for hefty monthly fees, and collect royalties off the sales.
A measly 0.55% of mineral rights in Canada are actually owned by homeowners!
The same goes for Australia, where investors need to purchase mineral rights (or what they call Miners Rights) from the Crown.
Aussie state and territory governments manage these rights and issue licenses to private companies for exploration and extraction. The system is designed to ensure that the economic benefits of mineral resources are shared with the public through royalties and taxes.
So America is the big exception here.
In most of the world, you own your home, but not the minerals underneath.
How did we get here?
A brief history of mineral rights
Gold’s been around for millions of years, and used as currency for thousands. Oil is much more recent — the first US oil well was dug in the 1805s.
But even thousands of years ago, the concept of mineral rights existed.
Ancient civilizations
In Ancient Greece, the state-owned mining rights that men could pay to lease and exploit in exchange for a portion of the proceeds.
Middle ages
In Feudal Europe, the right to exploit minerals was often granted by the king or local lord, who retained the majority of the wealth generated. This system reinforced the concentration of wealth and power among the ruling classes.
Modern era
The US stands out as one of the few countries that see mineral rights as the right of the property owner, which dates back to the days of the Founding Fathers — specifically, the General Mining Act of 1872.
Fast forward a few hundred years, and various laws were passed to regulate and facilitate the sales and leases of mineral rights to make money.
Today, an astonishing 12 million Americans are collecting royalties from oil and mineral companies working their land.
How to invest in mineral rights
1) Buy land and sell/lease the mineral rights
The US has tons of land available for sale on sites like LandWatch (though you may have better luck filtering properties with mineral rights on LandSearch).
A little help from an experienced real estate agent and property lawyer goes a long way.
Once you close the deal, the treasure hunt begins:
Just kidding!
Look, unless you happen to own a 50-ton excavator and millions of dollars' worth of mining equipment, you're probably "out of your element" here (heyoo!) and are better off selling or leasing your mineral rights to a company that knows what they’re doing.
This means you’ll get your fee or royalties while someone else handles the dirty work of drilling, extracting, and selling.
The US Mineral Exchange is a secure place to buy and sell mineral rights.
CEO Garrett Phelan has worked in the mineral and oil industries for over 20 years. His online exchange has been live since 2012, and places your listings on the radar of eager mineral and royalty buyers.
Remember what I said about "hidden" or unknown mineral claims? You absolutely need to consult with a lawyer first to avoid disputes down the line.
As such, the exchange also offers advisory services, and can help you price your mineral interest accurately.
2) Acquire mineral rights without surface rights
Sometimes, you don’t even need to buy an entire property itself. There’s money in simply facilitating the transaction.
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You can just acquire a property’s mineral rights from the owner, and then lease those rights to a company that can extract natural resources from the land.
Just like flipping houses, you can flip mineral rights. In this scenario, you're basically acting as a mineral rights middleman. You could even sell the rights later for a one-time fee, depending on what the market deems your rights to be worth.
That same resource, the US Mineral Exchange, also offers tons of listings to buy mineral rights with anticipated monthly cash flow.
Of course, there’s still risk here. Just like land sales, mineral rights sales can be slow. You might hold onto them for years before finding a buyer.
And when you do find a buyer, your royalties will be vulnerable to oil & gas price volatility. Just look at the dive oil prices took from Dec 2019 (~$74) to Apr 2020 (~$23): ??
On top of changing oil prices, some mineral rights owners fall short when they look at their royalty checks. Indeed, oil operators face class-action lawsuits for not paying up the royalties agreed — an easy crime to miss if you’re not an experienced investor.
Oklahoma oil company Kaiser-Francis just paid a $10 million settlement after a court proved that they didn’t pay enough royalties.
How did an established, reputable company make such an egregious error?
The courts say “improper accounting methods,” which might sound like an innocent enough mistake.
That is, if Kaiser-Francis didn’t also:
Kudos to these surface owners for spotting that something was amiss. Not everyone will be so lucky.
If you want to avoid dealing with oil companies yourself, you have another option...
3) Invest with an experienced Private Equity group
You could try to facilitate mineral extraction yourself — or you can have an experienced private capital group do it for you.
Phoenix Capital Group buys land and extracts oil from that land to deliver profits to its investors and partners in the form of corporate bonds.
These corporate bonds function like loans. As the investor, you loan your capital to the firm, who puts it to work for you.
The bonds offer monthly payments with a fixed rate of return between 9-13% annually.
According to CEO Adam Ferrari (great name), everything comes down finding the most profitable acreage to invest in:
[We] invested in proprietary software that helps identify, underwrite, and grade mineral rights opportunities based on their cash flow profile... This allows us to spot potentially valuable opportunities quickly and efficiently.
Once Phoenix has the rights, they dig for gold (usually oil). They do this under three models:
1) Mineral or Royalty Assets
Phoenix buys the actual mineral rights for a piece of land, meaning they own everything underneath the surface.
They contract an oil operator like Occidental or Chevron to extract the oil, and Phoenix collects royalties when the operator sells their oil.
2) Non-Operated Working Interest
This is where an oil operator owns the land — not Phoenix — and plans to dig on it.
The operator invites Phoenix to invest in the project as a partner. Phoenix pays a portion of the cost, and collects royalties as well.
Even if this arrangement is more expensive than buying the land, Phoenix can access higher returns and write off the cost in their taxes.
3) Oil Operating Arm
In this scenario, Phoenix conducts all oil operations in-house and acts as the mineral rights owner and operator.
They own the surface and mineral rights, and drill their own wells to keep the lion’s share of the income.
Phoenix points out that the quicker they get the oil out of the ground, the better (and higher returns). That’s because the longer an oil project goes on, the more money it costs.
Here are examples of these 3 types of projects and their returns:
To invest in Phoenix, you must have a US tax ID.
If you’re outside the US, your options for investing in mineral rights are slightly more limited, but there are still plenty of options.
4) Become a shareholder in a mining company
Another passive option is to buy stocks in an oil or mining company. This opens up opportunities for Canadians and Australians to benefit from successful mineral projects since they can’t actually own the rights there.
Even mineral companies have to jump through hoops for that access. They compete by bidding for mineral rights leases from provincial governments.
These auctions bring lots of pressure because the leases last as long as 15 years, minimizing the opportunity to try again for a while.
You could buy stocks in Enbridge, one of Canada’s largest oil and natural gas companies, at $54 a share.
But note that Enbridge has been responsible for several oil spills, including Line 3, which was the largest inland oil spill in the US. Opposition to Enbridge projects has resulted in several popular uprisings, most notably the Dakota Access Pipeline protests.
With that in mind, here are some of the biggest mining companies across the EU, Australia, China, Brazil, and India to consider:
???? Glencore
The Swiss giant is one of the world’s largest global diversified natural resource companies. But they also have a controversial past involving environmental issues and corruption.
???? BHP Group Ltd
The Australian mining giant is one of the world's largest mining & minerals companies. Trading on the ASX and elsewhere, they started talking a big game about sustainability, investing in solar and wind for their mining operations in Chile and Australia, and setting a target to achieve net-zero operational emissions by 2050.
???? Rio Tinto PLC
Another Aussie mining behemoth, Rio Tinto has been embroiled in some huge controversies. In 2020 they demolished a sacred cave in Western Australia which had evidence of 46,000 years of human occupation. The company apologized, and the CEO immediately stepped down.
???? Vale SA
The Brazilian multinational corporation is one of the largest mining companies in the world, primarily known for producing iron ore, nickel, and copper. They were responsible for the 2019 Brumadinho Dam collapse, which killed 270 people and was caught on film (!)
???? Nutrien LTD
This is a Canadian crop nutrient company trading on the Toronto Stock Exchange. They produces potash, nitrogen, and phosphate products for agricultural and industrial use.
???? Jiangxi Copper Co. Ltd
Trading on the Shanghai Stock Exchange, Jiangxi is China’s largest copper producer and one of the world's leading copper manufacturers. They play a key role in the global supply chain for electronics and renewable energy components.
???? Hindalco Industries Ltd
A flagship company of the Aditya Birla Group, is one of the largest aluminum and copper manufacturing companies in India and a leading player globally.
That's all for today ??
I hope you enjoyed this shallow dig to get you started. Brian will follow up with a deeper one in a few weeks.
Until then, reply to this email with comments. We read everything.
See you next time, Chrissy
Disclosures