What is a royalty?
A royalty is the right to receive a percentage or other denomination of mineral production from a mining operation.

Types of Royalties
There are two major types of royalties in use in the mining industry today. They are the net smelter returns royalty and the net profits interest royalty. The third type of royalty, the gross overriding royalty, is also now becoming better known outside the oil and gas industry, where it had its origins.
Although mention is often made in the industry of a “standard” form of royalty, there is, in reality no such animal. At most, it can be said that there are number of generic types of royalties with each generic type having the same general characteristics.

Net Smelter Returns Royalty
A Net Smelter Returns Royalty has been generically described as follows: A Royalty calculated on the net smelter return is essentially calculated on the amount received by the mine or mill owner from the sale of the mineral product to the treatment plant that converts the output of the mill to marketable metal. From the gross proceeds received there may be deductions for costs incurred by the owner after the product leaves the mine property and before sale, such as the costs of: transportation, insurance or security, penalties, sampling an assaying, refining and smelting, and marketing. No deductions are made for the operating costs of the mine-mill complex.

Royalty on Net Profits
A royalty based on net profits, known as a net profits interest, has been generically described as follows :A net profits interest (also known as an NPI or a net proceeds royalty) is…..calculated as a percentage of the gross cash income from a mine-mill complex less all expenses incurred to product the income. Typically the NPI does not become payable until the operator has recouped, from net products, its capital investment in the project and all pre-production costs.

The Gross Overriding Royalty
The legal calculus of royalties becomes more complex as one moves form the gross overriding royalty through the net smelter returns royalty to the net profits interest royalty. The gross overriding royalty (“GORR”) has its beginnings in the oil and gas industry, where it is known more simply as an overriding royalty.