Below is a comparison of advantages and disadvantages of different financial provisions. You may wish to consider a similar comparison of benefits and challenges for any of the benefit categories listed in Worksheet 4C—Defining and Prioritizing Community Benefits.
A payment amount that remains constant throughout a specified period, as compared to variable payments that are tied to a defined metric, such as profits or production.
+ Pros
Guaranteed, predictable, easy to administer
Not dependent on project profits
- Cons
Payment amounts won’t increase, even if production, commodity prices, or local disturbances increase.
A payment for using a certain location or doing an activity is calculated based on the quantity of products sold, which means the royalty rate is typically a percentage of a fixed amount per unit sold and the total royalty payment increases as the volume of outputs increases.
+ Pros
Payment amount increases as the company ramps up production.
Payments for environmental mitigation scale with environmental impact.
This is not dependent on project profits or falling commodity prices.
- Cons
Payment amounts won’t increase if commodity prices increase.
If production or operation costs fall, payment amounts won’t increase, and the community may lose jobs due to downsizing, automation, etc.
There is no guaranteed baseline payment.
A payment for using a certain location or doing an activity based on the value of the products sold, which means the royalty rate is typically a percentage of the value per unit sold and the total royalty payment increases as the value of the output increases
+ Pros
Community shares in benefits if the commodity price or production levels increase
Easy to administer
Not dependent on project profits
Not dependent on operating, financing, or capital costs
- Cons
Payments may fall, often rapidly, if commodity prices fall.
Processing steps after production (e.g., smelting, transportation) may limit the output value that can be capitalized on as royalties.
There is no guaranteed baseline payment.
A payment for using a certain location or doing an activity based on the facility’s or owner’s profits rather than a percentage of their revenue, which means the royalty calculation is tied to the business’s actual profitability after deducting all related expenses
+ Pros
Value can increase if mining costs decrease through efficiencies.
Value increases if commodity prices increase and costs are stable.
- Cons
Not all projects are profitable.
Agreement must be very clear; it can be hard to administer because of the need for accounting oversight.
Income changes with commodity price; communities are vulnerable during recessions.
Operating costs can fluctuate yearly.
Companies can manipulate deductions before profits are measured.
Payments can be delayed until projects become profitable after capital costs are recouped.
Compensation is most commonly paid to an investor for the use of a location or activity in exchange for the right to receive a share of future revenues generated by the extracted product. This does not require the transfer of ownership in the company.
+ Pros
Value increases if the project is profitable.
This can provide access to information and input to company management and decision-making.
This can provide greater control over the use of ancestral lands and the environment.
- Cons
The community may need to raise capital for investment.
The project might not be profitable or have comparable value to other investments.
Subject to the same risks as the company, like unexpected costs or commodity price changes.
The community may be required to share operating losses or capital expenditures.
The community may have liabilities as a partial owner
Legal costs can be high.
Funds may not flow early or readily back to the community; short-term benefits are unlikely.
