Mining companies have traditionally avoided selling off future production in streaming contracts. That’s changing as investors pile in and terms improve.
With mining-sector equities posting a dismal performance for most of the last decade and banks cautious about lending in the sector, junior and mid-tier mining companies don’t have a lot of financing choices. Alternative finance, most particularly in the form of metal streams, has become essential in the global mining sector.
The idea of a “stream” is not unique to the mining industry. Born out of the royalty contracts applied to hundreds of mining and oil and gas properties, streams seek to monetize expected future production and assets from a venture. The product can be intellectual property like music, literature and art or physical commodities like metals or agricultural products. Theoretically, streams could be applied to anything that generates a predictable flow of future assets.
In the mining sector, a streaming contract involves an upfront payment in exchange for the right to purchase some of the mine’s future production. Unlike royalties, which usually give purchasers a simple cut of revenues, streams grant the right to purchase a commodity at a fixed price, usually well below market value at the time of the contract. The initial payment varies according to the volume and strike price on the future purchases.
On the one hand, a streaming contract provides mining companies with upfront cash that can mean the difference between breaking ground on a project or leaving it on the shelf. On the other hand, streams are arguably the most expensive source of capital that miners can tap. The contracts limit the potential upside return of a venture and reduce the value of the mine to a potential buyer down the road.
“No issuer wants to do a stream, but it’s available capital,” says Paul Carmel, former CEO of Canadian mining company Richmont Mines—which was purchased by Alamos Gold in 2017—and a current board member of two mining ventures. “It’s okay if the commodity price cooperates, but you’re mortgaging your investment.”
Investors like the deals because they get exposure to commodities without the risks of developing and operating a mine. Cost overruns and operating issues hurt a producing mine but not its stream holders. If the mine is producing, streamers get their metal. But with banks lending more warily, streams provide a much-needed source of capital, and the contracts can have more-flexible terms than off-the-top royalties.
“It’s become unusual not to use streams as part of a mine financing,” says Robert Mason, a Toronto-based partner in the mining practice of law firm Norton Rose Fulbright. Mason drafted his first streaming contract for clients in South Africa in 2006. “We’re working on streams all over the world now.”
Since the first streaming deal created Silver Wheaton—now Wheaton Precious Metals—in 2004, the market has expanded rapidly. Between 2010 and 2016, the four biggest streaming companies—Franco Nevada, Wheaton Precious Metals, Royal Gold and Osisko Gold Royalties—pumped more than CA$15 billion (US$11.3 billion) into the mining industry, according to data collected by the Prospectors and Developers Association of Canada (PDAC). “To put this into perspective, the top four streaming companies alone had $15.3 billion in commitments during that period, while the entire mining universe on the Toronto Stock Exchange (TSX) and TSX Venture exchange raised $42.2 billion in equity,” says Jeff Killeen, PDAC’s director of policy and programs.
As the equity markets deteriorated again for miners last year, the streaming alternative has become all the more attractive. Initially focused on the precious metals markets, streaming has expanded into base metals like copper, nickel and zinc; oil and gas properties; coal; rare metals; and even diamonds. While the North and South American markets have adopted the practice most enthusiastically, it is on the rise across mining markets globally.
“Streaming has been slower to take off in Australia than in North America, but it’s growing here too,” says Andrew McLean, a Perth-based lawyer working in the mining sector at Herbert Smith Freehills. “Private equity funds are filling the role that traditional banks can’t fill, and streams are part of their proposition.”
Often, companies will sell a stream on a metal byproduct of their core mineral production to help finance development of the project. “It can be a win-win relationship,” says Andrew Kaip, Toronto-based managing director of mining research at BMO Capital Markets. “Capital is still scarce for junior mining companies. To get a mine up and running in this market, streaming is a viable alternative.”
The largest mining companies use streams sparingly. With portfolios of producing mines, and huge balance sheets, they can still find cheaper capital in the public equity and debt markets. Even for the giants, streaming has its uses, however. “For large companies, streaming is part of a suite of financial tools that can plug holes,” says Ben-Schoeman Geldenhuys, a Toronto-based consulting partner at Deloitte who is focused on the mining sector.
Holes develop when commodity prices are weak. Some of the biggest mining companies, including Brazil-based Vale, Switzerland-based Glencore and Canada’s Barrick Gold used large metal streams to pay down debt and bolster their balance sheets in the 2015-16 commodity slump. Silver Wheaton placed one of the largest streams in the industry with Vale in 2013, paying US$1.9 billion in cash and warrants for rights to gold from the company’s Salobo copper mine in Brazil and from mines around Sudbury, Ontario. Usually, for large companies, streaming is a way to manage financial risk rather than fund projects.
For smaller companies, streaming may be the only way to get a project off the ground. “Small to midsize companies near production generally can’t finance the construction of their mines,” says Mason. “Equity markets dried up in 2009-10, and streams filled the gap. Without them, there’s only so much debt a project can sustain.”
The rub is that, for a one-mine company, selling a stream on the future production of its target metal can dramatically reduce returns. “When companies issue a stream on their core mineral, they’re playing with their crown jewels,” says Geldenhuys. “They’re effectively walking away from the upside of the commodity price.”
Competition Heats Up
Fortunately for miners, more money is flowing into the streaming business. Returns generated by the big three publicly owned streaming companies—Wheaton Precious Metals, Franco-Nevada and Royal Gold—have dwarfed those of the average mining company in the last ten years and attracted robust investment. Shares in Franco-Nevada, the most valuable of the three, are up more than 400% since it came public in 2007. The S&P/TSX Global Mining index, meanwhile, is down 33% over that same time period. With a market capitalization of USD$19 billion, Franco-Nevada is now bigger than Newmont Mining, the parent company that spun it off twelve years ago.
Newer publicly traded royalty and streaming companies, like Canada-based Sandstorm Gold, Altius Minerals and Osisko Metals; and UK-based Anglo Pacific Group, are now competing for deals with the big three. And smaller companies like Metalla Royalty and Streaming and Maverix Metals target smaller deals under the radar of the largest streaming companies.
Private equity firms and institutional investors are also putting more money into the business. New York–based Orion Resource Partners closed on a US$2.1 billion mining sector fund last year and has become an important player in the Australia market. Toronto-based Waterton Global Resource Management has US$1.75 billion committed in two mining funds; and Triple Flag Mining Finance, also based in Toronto but backed by New York hedge fund Elliott Management, is targeting the industry.
In many cases, these new entrants are offering more than just upfront cash. They’re lending, and in some cases even making equity investments, as part of their streaming deals. The big publicly owned streaming companies are also lending as part of their proposition.
All the money looking for deals is giving miners more leverage in negotiations. Streams have traditionally been negotiated for the life of a mine, with the terms of the deal based on a mine’s proven reserves. That means streamers get a windfall when companies successfully develop new reserves on their properties. Increasingly, mining companies are negotiating buyback options on the streams or caps on the metal deliverable to streamers, in order to preserve more of their venture’s upside potential. “There are ways to minimize the costs of streams,” says Mason. “The agreements have become much more sophisticated as competition has increased.”
In a market where investors dominate, streams are a tempting alternative for mining companies—especially with new negotiating power. “Streams represent an opportunity,” says Mason. “Every company has to make a determination whether it is too expensive.”