Investing In Mineral Rights: Benefits, Risk, Considerations & Advices

Contents hide

2. Are Mineral Rights A Good Investment?

3. What Do You Need To Know Before Investing In Mineral Rights?

5. What Are The Risks Associated With Investing In Mineral Rights?

6. Things To Consider Before Investing In Mineral Rights?

There are a lot of ways to generate passive income and one of the best ones is by investing in mineral rights. Mineral ownership comes with several benefits and perks, but you also have to understand the strategies and the process of managing the assets.

While this might sound very enticing, you still need to fully understand what it takes to have oil and gas mineral rights.

In this guide, we will explore mineral rights, how to invest in them and potential risk to be aware of.

What Are Mineral Rights?

Mineral rights give ownership of the mineral assets (metals and fossil fuels) below the surface of an area of land. Mineral rights owners are given the right to explore, develop, and extract the minerals. Mineral owners may choose to drill oil and gas wells or excavate hard rock materials like gold.

Are Mineral Rights A Good Investment?

These are the opportunities you can get from making a mineral rights investment;

Short-Term Opportunity: Mineral rights are also great for short-term investments as private companies would gladly pay royalties to surface rights owners to extract minerals from their land. Signing bonus and upfront payments are usually included in mineral rights leases. The mineral rights owner gets immediate income since the payments are made at the start of the lease agreement.
Long-Term Opportunity: On the other hand, those looking to invest in mineral rights for a long period, can generate income from revenue-sharing agreements and ongoing royalties. Even after recovering your initial investment, you can keep earning from royalties. As mineral-proven reserves get more scarce, the mineral rights would also appreciate in value. It is also not a bad idea to consult your financial advisor first before going ahead with your investment.

What Are The Benefits Of Investing In Mineral Rights?

Some of the major advantages of owning mineral rights include;

Mineral owners do not take any drilling liability and pay no expenses.
There are no environmental risks.
It is an investment into “real” property.

These are some additional benefits you enjoy when you invest in mineral rights;

Potential for substantial-high returns

If the minerals on the land such as natural gas or crude oil are in high demand, then the value of the mineral rights can increase significantly.

Portfolio diversification

Having mineral rights is a great investment because you are able to diversify your investment portfolios, which gives you an asset class that reduces portfolio risk.

Inflation hedge

Minerals are typically a hedge against inflation and buying mineral rights gives you some protection against the fallout of purchasing power as time goes by.

Passive income

Mineral owners generate passive income as they receive royalties from oil and gas companies that extract minerals from the land.

Long-term investment

It can serve as a long-term investment as minerals are non-renewable resources, which means they have a long-term potential for value and growth. So, this ensures that oil and natural gas mineral rights owners earn for an extended period.

Limited liability

Mineral ownership can grant accredited investors limited liability. If exploration, drilling, and production are to be done by a company, then they would cover the expenses.

Tax advantages

There are investments that do not pay taxes and owning mineral rights is included. When you purchase mineral rights, you enjoy the tax benefits that come along with it.

Tangible asset

It is a valuable asset to have and if you wish, you can choose to sell mineral rights to oil and gas companies for a substantial amount.

Limited competition

Since mineral rights ownership is not as popular as other investments, there is limited competition in the industry, which means your investment has more value.

Control

Mineral rights owners have total control over how the property is developed, leased, or sold. You have the power to negotiate the allowed activities on the investment property, the amount of royalties paid, and also when the lease expires.

Potential for multiple revenue streams

By utilizing the investment opportunity, you can amass income from different streams including equity ownership, surface land use payments, bonus payments, and royalty payments.

Unique investment opportunities in a growing industry

The oil and gas industry is ever-growing and investing in oil and gas mineral rights opens you up to unique investment opportunities as it allows you to diversify investment portfolios and also provides a potential for high returns.

What Do You Need To Know Before Investing In Mineral Rights?

Buying or selling mineral rights is quite different from selling other properties. There’s the oil and gas lease agreement, royalty payments, and so many other things involved.

These are some important things you need to take note of before you become a mineral owner.

What are the Different Types Of Mineral Rights You Can Invest In?

There are various types of mineral rights including non-producing mineral rights and producing mineral rights. Producing minerals have one or more active oil and natural gas reserves while non-producing minerals are undeveloped oil, gas, and other natural resources.

If you want to know more about them, you can click here.

Some of the main types of mineral interests and rights are:

Mineral Interest (MI): The MI is a very common agreement and that is because it is very stress-free. In most cases, the property owner automatically owns the mineral rights and if drilling is to be done on the land, then permission and payment must be given to the landowner.
Royalty Interest (RI): This type of interest is one that is very beneficial as the owner can make money without making expenses. The mineral buyer doesn’t have to pay upfront or make other expenses like creating or drilling a well. If the owner leases the rights to an oil and gas company, they get royalty payments until work is done.
Overriding Royalty Interest (ORRI): This interest comes with limits that you don’t see in the royalty and mineral interest. The owner only keeps receiving royalties as long as there is production ongoing on the land.
Working Interest (WI): The working interest gives the owner the right to the exploration of the land. However, this is the one mineral right where the owner is required to pay expenses. It can be quite profitable if the owner leases the rights to an oil company as they would cover all the expenses associated with accessing the mineral properties.
Non-operated Working Interest: This type of right mostly occurs when the rights are passed down through family members. The owner does not operate the mining machines, which is why it is a non-operated working interest. Money can be earned without mineral management.
Net Profits Interest: This is a type of mineral right that is not very common. In this case, the owner would make money only when there is profit associated with the land area.

What Are The Different Ways To Invest In Mineral Rights?

Direct ownership

This is one of the easiest ways to invest in mineral rights. All you need to do is buy the mineral rights from the rightful owner. In this case, you are buying minerals and the land as well. Once the seller has made a transfer of ownership, you can decide to explore the minerals yourself or lease it out to mineral companies to get the job done.

Partnership

Partnership means you get to share the entire cost of acquiring the mineral rights, drilling and production, and every other cost with other investors. This way, you are not the only one paying, and you get to have energy assets with lesser capital.

Royalty interest

You’ll get royalty interest when you buy the “rights” to become eligible for a percentage of proceeds that come from the minerals’ extraction. So, if you are interested in this method, know that you won’t have any claim or ownership over the property, but you’ll receive payment from the royalties based on the extraction and production of minerals on the property. On the brighter side, you don’t have to worry about paying for the cost of anything unlike rental properties, as you aren’t the rightful owner.

Exchange-traded funds (ETFs)

Another easy way to get invest in mineral rights without taking on too many responsibilities is through ETFs that deal with mining companies involved in producing gold and other valuable resources. When you invest in ETFs, you are entitled to a broader portfolio of mining companies, rather than individual stocks.

Mutual funds

Mutual funds are similar to ETFs because you have a guarantee of minimal loss if things go south. With mutual funds, you can spread the risk out to across different companies. So, generally, you have a better chance of getting interest and proceeds.

Real estate investment trusts (REITs)

If you intend on investing in mineral rights that relate to real estate, this is the way to go. This provides a more diversified portfolio, and you’ll have better exposure without owning any mining ass

Private Equity

With private equity, the focus is on the companies that own the natural resources. So, you get to make direct investments with them, and this has its benefit because you can properly discuss the terms and price. Also, you get to have a significant influence on the decision-making process of the business.

Direct investment in a mining company

This involves a complete transfer of ownership from a company that operates mineral assets to an investor. If you intend to use this method of investing, ensure you have a broad knowledge of the mining industry.

Joint ventures

If you don’t intend to shoulder the entire responsibility when it comes to investing in mineral rights, then you can partner with other investors. This will save you less capital, and will still yield millions of dollars in the long run (provided everything goes as planned)

Purchase of production assets

Investing in equipment used to produce and extract minerals is a lesser risk, and a more predictable means of cash flow, because it involves purchasing existing mineral assets that are generating revenue already, and that’s a big advantage. Meaning, you won’t take part in the developing or exploration risks.

How To Invest In Mineral Rights?

If you are looking to start investing and become a mineral rights owner, these are the ways you can do that.

Research Potential Investment Opportunities

Before investing, research the trends and challenges, so you can use that to your advantage, and know what decisions to avoid.

Evaluate Investment Opportunities

After identifying potential opportunities, check out the quality of the mineral assets, and do a thorough background check of the legal environment.

Determine Your Investment Strategy

Figure out what approach is best for you, such as direct investment, joint ventures, private equity, etc.

Contact A Mineral Rights Broker Or Attorney

Same as rental properties, investing in minerals (like oil and gas) is complex, and you need a licensed lawyer to help you out.

Negotiate And Purchase The Mineral Rights

After identifying the right location, discuss and finalize the terms with every person involved.

Conduct Due Diligence

Make sure you verify that the seller owns the property and has good records with the state, and search for the land on the state’s oil and gas website

Close The Transaction

Secure the deal, sign all the necessary documents for your new minerals, and collect the mineral deed.

Monitor The Investment

After securing the deal, track the performance to be sure it meets and exceeds your expectation.

Secure Financing

This is dependent on the cost. Assuming it’s a large amount, you’ll need financing to make the investment. You can consider options like bank loans.

Conduct A Title Search

Do a proper title search to be certain the seller has full and valid ownership, don’t assume!

Consider Leasing The Mineral Rights

There’s no rule book that expects you to participate in the development of the mineral rights, you can lease it out.

Work With A Geologist Or Engineer

It’s best to contact the help of a professional Geologist, as they can perform better and give an accurate valuation of the property.

Consider Forming A Partnership

In many countries, mineral rights work like properties, meaning they can be leased to investors. If you want to split costs and risks, form a partnership with other investors.

Prepare For Ongoing Expenses

Developing minerals requires a lot of money, from purchasing of equipment to payment for manual labor. Put all these expenses into consideration and save accordingly.

Plan For Tax Implications

To avoid getting into trouble with any government authority, consult a tax professional who will help explain your potential tax implications; if any.

What Are The Risks Associated With Investing In Mineral Rights?

One of the major risks that come with mineral rights ownership is the untrustworthy people in the oil and gas industry.

Commodity Price Risk

Commodities don’t have a fixed price, hence they vary, and this might negatively impact the proceeds of your investment.

Exploration Risk

A huge amount of exploration goes into mineral extraction, and you might not get enough minerals to justify the investment.

Regulatory Risk

Regulations change over time, and unplanned legal issues might arise.

Geopolitical Risk

Political instability can create a compromise and negatively affect investment.

Technological Risk

When there’s technological obsolescence, it can affect the quantity of extracted minerals.

Legal Risk

With mineral investment, there’s a risk of legal disputes related to environmental factors, and even permits.

Operational Risk

You need specialized equipment for drilling and mining, plus you’ll require the expertise of professionals. However, accidents or machine failures can happen, and this will affect profitability.

Environmental Risk

Environmental pollution from extracting minerals can result in legal liabilities as well.

Currency Risk

Exchange rates aren’t fixed, and depending on the investor’s home, it’s possible to run at a huge loss if care isn’t taken.

Liquidity Risk

If there’s a market downturn, selling mineral rights will be challenging, as there’ll be limited buyers.

Capital Risk

Investing in minerals involves huge capital, and there’s the probability that you might not actualize your invested funds.

Things To Consider Before Investing In Mineral Rights?

These are some important factors to consider before you invest in mineral rights;

Conduct Research: You should thoroughly inspect the land you wish to invest in to be sure it has an operable mineral deposit.
Evaluate The Mineral Deposit: Check out the quality and quantity of the mineral deposit and also how much it would cost to extract and process the specific minerals. You should also take into consideration the market price as well as the present and future demand for the minerals.
Legal Considerations: Before you invest, it is highly important that you get familiar with the framework and specific details that govern mineral rights. You should check and see if there are any regulatory or environmental issues and also see if the land is subject to existing mineral leases.
Investment Structure: You should choose exactly how you want your investment to be structured. It can be through a royalty interest, a partnership, or direct ownership.
Risk Management: There are certain risks that are associated with investing in mineral rights, including exploration risks, changes in regulations, and fluctuations in commodity prices. It is advisable to manage these risks by diversifying your portfolio.
Negotiate The Terms: When the process of transferring ownership of the rights is ongoing, make sure you negotiate the purchase agreement or lease terms as well as the payment terms, duration, and royalty rate.
Understand The Production Process: You should have in-depth knowledge about all the processes associated with mining and production.
Evaluate The Operator: If you are looking to collaborate with a mining company, then you should evaluate the operator’s reputation, financial strength, and work experience.
Monitor The Investment: Ensure that you monitor the operation and production even after you have invested in the rights.

Where Can You Buy Mineral Rights?

These are some of the top ways you can purchase mineral rights;

You can buy directly from mineral owners
Through mineral rights brokers
From online auctions
Through negotiated sales and sealed bids

If you are looking to buy mineral rights from a trusted source, then you cannot go wrong with Pheasant Energy. With transparent deals and amazing opportunities, we are one of the best in the industry.

Call us today for a consultation and get professional advice coming from over 70 years of combined experience.

Conclusion

Investing in mineral rights is a wise step that comes with delightful benefits like generating passive monthly revenue, diversification of your portfolio, and many more. Now, with our knowledge at your disposal, you can make a well-informed decision about your mineral rights investment.