Mining properties can be a lucrative investment, but they come with their share of risks. One way to mitigate those risks is by entering into option agreements with potential investors. It’s important what option agreements are and why they are such a popular choice in the mining industry. These agreements reduce risk and create more diversified income streams for mining companies, a major advantage for the companies and their investors.
Option agreements are contracts that give the option holder (in this case, the mining company) the right to purchase a property or interest in a property at an agreed-upon price within a certain period of time. The investor agrees to pay a fee for this option and, if all goes well, will exercise their option to buy the property when the time comes. If the property is not purchased, the option expires and the investor is out their fee.
Option agreements are popular in the mining industry because they offer a number of advantages to both the company and the investor. For the company, it provides them with an opportunity to hedge their bets against fluctuations in commodity prices. It also allows them to raise capital without giving up equity in the company. And, if the property is successfully developed, it provides a nice return on investment for the investor.
There is one main risk associated with option agreements, of course. The most obvious is that the option holder may not be able to purchase the property when the time comes. However, this is rare, as companies prepare and plan for the upcoming purchase with intent.
One example of this strategy in action is Honey Badger Silver, a pure-play silver mining company building a portfolio of high-grade, strategic properties. The company has recently acquired the Clear Lake Deposit, which has large historic silver, zinc, and lead resources. The variety of minerals present creates more potential for diversified income streams and lowers the overall risk of the investment. The transaction is subject to a 1% net smelter return royalty on all metals except silver. The Clear Lake deposit is known to be an important source of zinc and lead but holds mostly silver. The company is exploring multiple options to make the best use of the historic Clear Lake resource. With the acquisition, Honey Badger Silver Inc. became the owner of a historic resource of 5.5 million ounces of silver.
Licensing agreements, royalty agreements, and option agreements are all important tools in the mining industry. Each has its own unique advantages and disadvantages, but option agreements are a favourite for their ability to lower risk and create more diversified income streams.
Companies that only engage in the exploration stage of mining are particularly vulnerable to changes in commodity prices. Option agreements allow them to continue their operations even if commodity prices slump. And, if the price of silver rises, as it is expected to do in the next few years, the company will be in a strong position to take advantage of it.
Silver is seen as a safe haven investment and is expected to outperform other metals in the next few years. Like gold, it is a stable store of value, however, it also has industrial uses that make it more valuable than gold. These fundamentals, coupled with increasing global demand, make silver a metal to watch in the next few years during the current commodities supercycle.
Honey Badger Silver is a perfect example of a company that is diversifying its income streams and lowering its overall risk by entering into option agreements. And, with the recent acquisition of the Clear Lake Deposit, they are well-positioned to take advantage of any future rise in silver prices.