Streaming/royalty companies

Dear Mufti sahab,

Salam. Thanks a lot for guiding us with your valuable insights.

I have a question regarding a company called Wheaton Precious Minerals (WPM). I have done the screening for them and they are compliant with all financial ratios. However, I am confused with their royalty/streaming earnings. Here is a short description of that

" Wheaton Precious Metals provides cash to mining companies to aid in the build-out of a mine and in return receives a percentage of precious-metal output at a below-market cost. Wheaton then sells what it receives at market rates, thereby banking the difference as profit."

Is this allowed in Islam? I have checked that they are not involved in Hedging or derivative activities.

Jazakallah khair.

@Mufti_Billal, @Mufti_Faraz_Adam your expert opinion needed please. Also,if company’s overall business is permissible, but from the financial statements, it seems involved in derivatives and hedging, its non-compliant,right? I am talking about companies like Nike,Sanofi, Roche, Workday; they all have derivative and hedging assets/liabilities.

Wasalam

May Allah bless you.

  1. It depends how the contract of streaming/royalty is constructed to determine if it is shariah compliant.
    However from a shariah perspective I can deduct the following:
  • royalty may resemble equity since the mining company shares its revenue, but it is not equity. I think it can still be considered permissible depending on certain factors such as possession and ownership.
  • stream might be problematic from a shariah perspective, as you are effectively buying gold on credit. Please see the following link: Buyibg gold in instalment

I would need to review a royalty contract to advice further. @Mufti_Faraz_Adam might have a different opinion.

  1. If they are involved in non shariah compliant transactions, then it might still be permissible to invest in a company which core business is halal. However, we need to assess the percentage of haram transactions they are involved in. Please see the following link on how to determine if a company’s stocks are halal or not: https://www.islamicfinanceguru.com/investment/how-to-screen-for-halal-sharia-compliant-shares/

And Allah knows best!

Jazakallah @Mufti_Billal. It will be hard for me to track and understand the streaming and royalty component. So I will stay away from those shares.
In terms of derivative and hedging, would that fall in the 5% haraam revenue category. These companies are complying with all the rest of screens.

@Mufti_Billal & @Mufti_Faraz_Adam, please let me know if the derivative and hedging assets/income should be less than 5% of the revenue. If not, how else can we account for that?
As mentioned before, companies like Nike,Sanofi, Roche, Workday and Adobe have derivative and hedging assets/liabilities.

Since derivatives and hedging are non compliant trades, the holder of such financial instruments will have right to the capital as the contract is void. Therefore, not all of the income needs purification. Only the gain.

For such complex scenarios, you are best using a Shariah stock screener and relying on their judgement and advice of the impure income element.

@Mufti_Faraz_Adam, I have checked Zoya, a shariah screener. It doesn’t seem to go down to the derivatives and hedging level. It only checks interest income and other debt ratios. Could you help me with purifying the derivatives/hedging related income.
If I look at Adobe’s or Nike’s balance sheet, they have Current Derivative and Hedging Liabilities. How do I account for them while purifying?
Many thanks for your help in getting my portfolio shariah-compliant.

@saadm, Salam. saw your response to another post on this forum. Does Zoya accounts for derivatives and hedging (Please see the chain above). If it does, how do you screen or purify for that?

@Mufti_Billal @Mufti_Faraz_Adam Kindly spare some time and guide me on this issue.

Salaam! Yes, derivatives are already accounted for in the interest-bearing securities ratio which is calculated as: (Cash & Equivalents + Deposits) / Market Cap

“Cash & Equivalents” includes short-term investments, which consists of the following:

  • Available-for-sale securities
  • Cash on hand
  • Cash in bank
  • Cash in escrow
  • Certificates of deposit
  • Commercial paper
  • Demand deposits
  • Derivative investment
  • Marketable securities
  • Money market funds
  • Restricted cash
  • Restricted investments
  • Short-Term financial asset
  • Time Deposit

While there’s a difference of opinion among scholars when it comes to purification, the AAOIFI version is calculated as (Total non-compliant income / Total outstanding shares) x (Number of shares you held at year-end). You can read about this in more detail in Zoya under Settings > FAQs.