Metals Streaming as a Financing Mechanism
Streaming is a relatively new method of financing mining projects. The business model generally follows a pattern where the streamer pays a lump sum fee to a resource partner (the actual operator of the mine) in need of financing (presumably because the operating company lacks access to debt or equity capital). In return, the streamer receives consideration in the way of buying a percentage of the gold produced from the mine at a low fixed price, for the life of the mine.
Streaming is not limited to mining, although the nature of mining makes streaming particularly attractive. However, streaming companies can cover any business, including soft commodities such as canola or even marijuana. Capital is fluid, and oil and gas companies can have similar operations via royalty holdings (PrairieSky – a spin off from EnCana, and Freehold Royalties) – although slightly different, and we will have some literature about that up shortly.
Up until recently, due to the novel nature of commodity streaming, streaming agreements were rare. As streaming companies demand a high level of industry knowledge, the streaming industry was not a competitive market.
However, the market is becoming more saturated because of the continued profitability of commodity streaming to date. Prominent names include Silver Wheaton, Royal Gold and Franco Nevada. Streaming popularity has also grown as the model as described above does not come with the downside of traditional financing for mines.
Now, mine streamers are getting worse terms – whereas previously they had very long dated agreements often lasting the life of the mine, miners are more savvy about giving up their future production in perpetuity and will cap streaming agreements.
Why Metals Streamers Exist
Traditional debt financing is not available for many mining companies because of the uncertainty and volatility of mining operations. With vanilla secured loans and revolvers, a production change or movement in commodity prices can make debt service difficult without a reserve based facility, with no guarantee the principal can be repaid.
As such, the inflexibility of traditional debt financing makes it difficult for a mining company to have favourable terms as the lenders’ goals are not aligned with that of the mining company’s.
Conversely, additional equity financing is dilutive to shareholder value and can be difficult to raise due to the reputation of the industry. Streaming provides an adequate medium between the two, and allows flexibility for the mine project and ensures that the operator still holds control and access to profit.
This is not to say that streaming is only for junior miners – many established mining companies will enter into streaming agreements to raise capital or to isolate commodity exposure in a mine. For instance, a miner that is only interested in gold or copper may choose to sell down their silver byproduct.
In essence, streaming is similar to a call option where there is upside potential and downside protection. As a financier, the streamer is not affected by capital expenditure overruns, maintenance overruns, and procurement cost changes; all which are common challenges in the mining sector.
The streamer also has the benefit of paying a fixed cost for the commodity for the life of the mine while fully participating in commodity price upside and exploration finds that lead to an extended mine life.
In contrast, royalties usually are a fixed percentage of revenues, which can be increased if costs are recovered. Royalties are ongoing economic interests in the production from a mining property. Depending on the terms of the contract and applicable law, royalties are generally not obligated to fund exploration, development or maintaining capital expenditure. They benefit from any new finds in the subject property. Royalty agreements, unlike commodity streaming agreements, have been around for a long time and are part of a competitive market.
Depending on the nature of the agreement, adjustments will have to be made in financial reporting. Certain reserves that are owed to the streamer may have to be considered disposed.
Metal Streamers and Investment Banks
Investment Banking for metal streaming and royalty companies exists – even though they are to some extent bankers for the operating companies in their streaming portfolio.
As the market matures, streamers (whose executive teams are often ex-bankers) have themselves been sources of robust capital market activities while the operating companies they collect royalties from cannot access them.
When an attractive new streaming agreement is found, streaming companies may raise equity. Intuitively, streamers actually trade at a higher multiple based on earnings than miners themselves due to the lack of operational risk and the steadier cash flows that come from streaming versus operations similar to how a restaurant company with many franchises will actually trade better than one with many company owned stores (assuming they are operated properly) as it scales much faster and has a much higher return on equity. As such, it is beneficial to raise cheaper capital at the streaming level before dropping it down to the operating mines.
On top of that, streamers are also good candidates for consolidations via mergers & acquisitions as corporate knowhow (geological data, mining information) can be pooled and corporate expenses (sales, general and administrative, streaming portfolio monitoring and financial reporting) can be cut.
As metal streamers are seen as much less risky than mining companies due to their lack of exposure to operating costs and limited downside risk to the underlying price of the metals, they trade at a richer valuation to miners, where business is inherently very risky.
When investors look at streamers, they will look at the same risk factors as with regular miners but will also consider:
- Mine Owner/Operator for the mine where the streaming agreement is conducted
- Location of the mine for similar geopolitical risk
- Upfront consideration paid to the miner and whether 1) pricing is prudent and 2) is favorable in today’s commodity price environment
- % of production purchased
- Term of the agreement, whether for the life of the mine or a set period – by extension, analysts will care more about the life remaining on the agreement
Metal Streaming Examples
From Teck Resources’ 2016 Annual Report
“Pursuant to a long-term streaming agreement made in 2015, Teck has agreed to deliver an equivalent to 22.5% of payable silver sold by Compañía Minera Antamina S.A., using a silver payability factor of 90%, to a subsidiary of Franco-Nevada Corporation (FNC). FNC pays a cash price of 5% of the spot price at the time of each delivery. In 2016, approximately 4.4 million ounces of silver were delivered under the agreement. After 86 million ounces of silver have been delivered under the agreement, the stream will be reduced by one-third.“
Gold Stream Agreement
In 2015, Carmen de Andacollo sold an interest in gold reserves and resources from the Carmen de Andacollo mine (Andacollo mine) to RGLD Gold AG (RGLDAG), a wholly owned subsidiary of Royal Gold, Inc. Under the terms of the agreement, RGLDAG is entitled to an amount of gold equal to 100% of the payable gold produced from the Andacollo mine until 900,000 ounces have been delivered, and 50% thereafter. RGLDAG pays a cash price of 15% of the monthly average gold price at the time of each delivery. Carmen de Andacollo and Royal Gold Chile Limitada, a wholly owned subsidiary of Royal Gold, Inc., terminated an earlier agreement entered into in 2010. Under the terminated agreement, Royal Gold Chile Limitada was entitled to a payment based on 75% of payable gold produced from Andacollo mine until 910,000 ounces had been delivered, and 50% thereafter.
We received cash proceeds of $206 million (US$162 million) as a result of Carmen de Andacollo entering into the new agreement and terminating the separate agreement from 2010. We recorded the transaction on a net basis as a sale of an incremental mineral property interest, and the net consideration was accounted for as a recovery of mineral property costs. Accordingly, no gain or loss was recognized on the transaction. We account for the 15% ongoing payment as a reduction of our cost of sales and not as revenue, as we consider it to be payment for the mineral interest and mining and refining services. The 15% ongoing payment contains an embedded derivative relating to the gold price that is marked to market each period with changes flowing through profit (loss) (Note 26(c)).
From Wheaton Precious Metals Streaming Corporation’s 3Q 2017 Report:
On October 15, 2004, the Company entered into an agreement with Goldcorp Inc. (“Goldcorp”) to acquire an amount equal to 100% of the silver produced by Goldcorp’s Luismin mining operations in Mexico, including the San Dimas mine. On August 6, 2010, Goldcorp completed the sale of San Dimas to Primero Mining Corp. (“Primero”), and pursuant to the amended silver purchase agreement with Primero (the “Primero SPA”), the Company acquires 100% of the payable silver produced at San Dimas up to 6 million ounces annually, and 50% of any excess for the life of the mine. Goldcorp has provided a guarantee with respect to the delivery by Primero of all silver produced and owing to the Company until 2029 and Primero has provided Wheaton Precious Metals with a right of first refusal on any metal stream or similar transaction it enters into.
As at September 30, 2017, the Company has received approximately 78.3 million ounces of silver related to San Dimas under the agreement, generating cumulative operating cash flows of approximately $1.1 billion, with approximately 0.2 million ounces of cumulative payable silver ounces having been produced at San Dimas but not yet delivered to the Company, representing a 0.1 million ounce increase during the three month period ended September 30, 2017.