CHI: To Become a Royal - Become a Royalty King
Article By Jay Martin
Years after Michael Jackson died, his estate was paid $750 million to buy out the remaining 50% of his collection of music royalties. The strange thing is, the bulk of his collection of song royalties weren’t even his. He had the rights to over 4,000 songs, including over 250 Beatles songs! Ironically, MJ’s entry into the royalty world came from the very musician he would profit most from – Paul McCartney. At one time, Michael Jackson and Beatles great McCartney were friends. The lyrical heavyweights got to know each other in the 70s and co-wrote some of the greatest hits of the 80s. But those weren’t the songs that paid off the most for Jackson. Instead, it was some of the Beatles’ own greatest hits which he had no part in writing at all – songs like “Hey Jude”, “Yesterday”, and “Let it Be.”
The Beatles’ Billion Dollar Blunder
When MJ and McCartney collaborated, McCartney shared with Jackson his regrets about losing his stake in Northern Songs - A publishing company he had set up with John Lennon to manage the rights to their music. As an artist, McCartney had taken a short-term gain but missed out on a long-term opportunity when he gave away his rights. He tried to make up for this mistake by investing in the royalties of other artists. Jackson listened and learned. He joked with McCartney that one day he would own the Beatles songs. That joke became reality in 1985 when he bought ATV Music, which owned the Beatles’ catalogue. But it wasn’t cheap. The deal set Jackson back ~$48 million (and actually cost him his friendship with McCartney). But it would pay dividends for the Jackson estate for decades to come.
The ATV collection of music was opened up for commercial use (much like a mine going into production) & the profits began streaming in.
Jackson eventually sold 50% of ATV to Sony for $95 million in the mid 90’s, a four bagger that still paid royalties every time the songs were used. And the cash continued to come in until seven years after his death, when Sony purchased his remaining ownership of the company for $750 million. That $48 million dollar investment into royalties resulted in a profit of over $800 million dollars. And that’s not even including the yearly revenue stream that the collection brought in.
Royalty Makes Rulers
Royalties occur in many industries outside of music too.
Another industry that has provided record profits for savvy royalty investors is the movie business.
Disney’s Marvel Cinematic Universe franchise has repeatedly broken numerous records at the box office and has raked in over $22.5 billion in revenues.
But back in 1998, Sony passed on the chance to buy the movie rights to Marvel’s comic book line for the rock bottom price of $25 million.
At the time, Marvel was emerging from bankruptcy and was desperate for cash. Sony failed to pull the trigger and missed out on what could have been one of the most lucrative investments in all of film history.
Paul McCarthy & Sony both learned a valuable lesson in royalties…the hard way.
A Low Overhead, High Profit Machine
Investment opportunities in royalties aren’t exclusive to the entertainment industry.
Warren Buffett compares buying royalties to owning a toll booth. Once you’ve got it, you’re getting paid every time someone passes through.
In the stock market, companies that have royalties deliver consistent returns and growth for their shareholders.
Here’s a chart of the 10 year returns of one such company (and in a market with a sliding commodity prices too)...
You might think this chart belongs to some tech stock or blue-chip company, but it’s actually Franco Nevada – a mining royalty company. It you look back through all the bull and bear cycles in the resource sector, Franco Nevada has kept on delivering for their shareholders, much like ATV’s music royalty portfolio. Royal Gold is another company that doesn’t explore, mine, or produce any of their own gold. They just sit back and collect royalties on over 40 different mining projects around the world. These multi-billion-dollar royalty companies are still delivering solid consistent returns for their shareholders, but where the real money can be made is by getting into such companies early. It’s already too late for 5x-10x potential returns from these massive, already-established royalty companies. But finding the right royalty company… with the right set of assets… at the right time, can be life changing for your portfolio. Much like how Marvel had their backs against the wall and were desperately looking for capital in the late 90s, junior miners are often desperate for capital. Taking a mine from exploration into production is a difficult and expensive task. To help these projects get off the ground, mine owners are always looking for creative ways of getting capital. That’s where royalty companies come in. These royalty companies offer capital to progress the project along, in exchange for a % of the future revenue from the mine. It’s a win-win for both parties:
The mining company gets their project into production with less debt, and
The royalty companies get a cut of the profits for a set period of time.
Building a Profitable Basket of Royalties
Now, mining companies have found another way to unlock additional long-term value on their projects – by spinning out royalties on their own projects into a new subsidiary.
An example of this would be Great Bear Resources, which announced last fall that they were going to spin out the royalties on their flagship property.
The markets responded favorably to the news, and it brought additional value to their shareholders. The stock has gone up over 140% since then.
Tomorrow, I’m going to tell you more about a mining company that has spun out 14 royalties on their own projects into a new subsidiary.
You now know how profitable royalties can be.
And you know that multiple returns on your money aren’t just possible, but very realistic, when it comes to royalty companies.
And if gold prices keep going higher, 4-digit returns aren’t out of the question…
I’ll be introducing you to a company that owns both the highway and the toll booths on numerous highly-sought-after gold assets. And all of them were acquired when gold was significantly lower than $1,950 an ounce.
Their team also has experience taking mining projects from exploration to production.
The last company we profiled was up nearly 100% in a few short weeks. You don’t want to miss tomorrow’s email.