Considering a mineral stream? Some terms to negotiate

Streaming deals provide an attractive alternative to equity and debt financing in a challenging market. Advance stage mining companies are able to access a non-dilutive source of capital, allowing management the opportunity to retain control over the company. There have been a number of recently announced streaming deals in the Canadian mining sector since last August.

The following describes certain terms to consider including in a streaming agreement to address a few potential issues.

Production shortfalls

While delays in production can expose sellers of mineral streams to certain risks, the type of streaming agreement used and the manner in which delivered product is quantified, can mitigate exposure.

In a “fixed” contract, the seller agrees to sell the purchaser a fixed amount of product over the term. While pricing is usually more favourable in a fixed contract, the seller will be responsible for shortfalls in the event of a delay in production, requiring the seller to acquire product from another source in order to satisfy delivery requirements.

However, in a “percentage” contract, the seller agrees to sell the purchaser a percentage of product actually produced.  There is no obligation on the seller to make up for a shortfall in production. Despite this benefit, the seller might be required to refund a portion of the upfront deposit in the event of reduction in expected production.  Risks associated with such a clawback can be mitigated by reducing the percentage of guaranteed deliveries in the early years of production or negotiating a right for the seller to “buy back” a percentage of the stream, triggered upon a production shortfall.

Loss of future production

Mineral streams can also detract from the value spent on exploration as future production is sold for a discount. Typical pricing terms require payment (expressed as a credit to a notional mineral account) of $400 per ounce of gold, $6.00 per ounce of silver, $200 per ounce of platinum and $100 per ounce of palladium.

However, for a base metals company, the ability to monetize non-core production to fund construction of a mine to produce core-assets may be worth the trade off. In addition, price adjustment clauses can be negotiated to require an increase in the price paid for deliveries following a specified term or amount of production.

Restricting future transfers and changes of control

Streaming agreements typically impose restrictions on the seller’s ability to transfer the mining properties and complete change of control transactions. However, the terms of the agreement will allow for such business dealings in certain permitted circumstances. This allows the seller the opportunity to negotiate requirements it considers acceptable.

Sellers will typically agree to requirements that transferees and acquirers agree to be bound by the terms of the streaming agreement, to assume the same obligations the seller owes to the purchaser and grant the same charges and security over the assets serving as the collateral. However, the circumstances in which a transfer or change of control transaction is permitted will need to be tailored accordingly.

Requirements that all project assets be included in a transfer of mining properties might negatively impact the ability of certain sellers to engage in operations on its remaining properties. Similarly, requiring a “permitted” acquirer to possess certain attributes (e.g. to be publicly traded or domiciled in a certain jurisdiction) might restrict the seller’s ability to negotiate an alternate transaction in the face of an unsolicited bid. If a seller is particularly keen to minimize the impact of a streaming deal upon future M&A opportunities, the effect of transfer restrictions can be minimized by expressly carving out change of control transactions (e.g. plans of arrangements and take over bids) from the definition of “Transfer” used in the agreement.

Protecting commercially sensitive information

There is an obvious need to protect against unauthorized disclosure of information provided about a mineral project to the purchaser of a stream. Sellers of a stream are required to deliver periodic reports and other information to the purchaser. At a minimum, this information will include an account of the minerals produced and can extend to include construction reports, development and operating plans, permitting schedules, reports concerning compliance with environmental permits, work plans, budgets, life of mine forecasts and advance copies of NI 43-101 technical reports.

Protecting such information from public disclosure can be sought through a robust definition of “confidential information” with limited carve outs. The survival of the confidentiality provision beyond the expiration of the term or termination of the agreement and permitting the seller the right to seek equitable relief including pursuing an injunction are additional measures.

In summary

A mineral stream provides an attractive financing alternative to access the funding required to advance construction and accelerate production and revenue generation.