Four trends driving mine streaming this year
Streaming transactions have remained at the forefront of mining financing this year.
A mining stream involves the sale by a company of a right to a certain percentage or amount of future production of a commodity from a company’s mining project in exchange for a heavily discounted upfront payment.
As global equity capital markets remain weak, mining companies have increasingly turned to selling streams in order to finance the development and/or expansion of their projects. As a result, there continues to be a rapid increase in the number of private equity funds and other strategic buyers that are seeking to invest in mine streams. In fact, the proliferation of stream purchasers and the significant number of streams being completed suggest that mine streaming has now become “mainstream” as a primary source of financing for resource companies.
While mine streaming is not a new area, there have been four major trends in this sector over the last several months:
A mining company’s obligations to the stream purchaser under a streaming agreement have traditionally been backstopped by extensive security in favour of the stream purchaser over the mining project’s assets and production. This is to provide the stream purchaser some level of protection in the event the seller defaults under the streaming agreement or if the seller becomes insolvent.
However, stream purchasers have recently started to move away from bank-like security on select streams, in particular with respect to streams on producing mines and/or uniquely attractive streams sold by major mining houses. This is because security-related features can lead to streams being viewed as debt by a mining company’s credit rating agencies, which can be a major problem for mine companies that are selling streams to pay down existing debt.
Instead of traditional security, stream purchasers have become more willing to consider security substitutes from such higher profile mining houses, including: staged milestone- related instalments of the upfront payment – which limits a purchaser’s exposure if a project fails early; production and delivery guarantees; and dedicated cash accounts in favour of the stream purchaser.
In combination, these tools are being increasingly employed to avoid the disadvantages of bank-like security on streams.
Limiting the sale of the upside
Streams are often viewed as a very expensive source of capital due to the amount of a project’s upside that is typically sold to the stream purchaser. This is partly because stream buyers typically calculate their purchase price on the basis of a project’s reserves while either ignoring or heavily discounting the project’s non-reserve resources. As a result, mining companies receive little to no value for resources that are subsequently advanced into reserves after the stream takes effect.
To make streams more attractive, senior mining executives are increasingly demanding limitations on the upside that is sold under streams. For example, the buy-back right has become a significant tool by which a mining company can repurchase all or part of a stream at a certain date for a preagreed price, thereby allowing the company to buy back a portion of the upside originally sold under the stream. In addition, mining companies often insist on a cap on the number of ounces or tonnes of the commodity deliverable under the stream so as to avoid losing decades of upside from a project.
Streams on new technology commodities
For many years, streaming transactions were limited to precious metal projects and later evolved to include various base metals such as nickel and zinc. However, 2018 witnessed the rise of the new technology streams – streams on the metals critical to new battery technology, in particular, lithium and cobalt. Many of the larger and more high profile streaming deals this year involved these new technology commodities. It is too early to know if this trend will continue or if we will see streams on other new technology commodities in the near future.
Converting offtakes to streams
Offtakes offer a number of financial reporting disadvantages to holders that are public companies which can make the offtake appear on the holder’s financial statements as less attractive than it really is. Many offtake holders have therefore started to negotiate with issuers to convert their offtakes to streams, thereby securing more conventional financial reporting. There has been significant recent activity relating to the negotiation of streams to replace existing offtake agreements.
As the proliferation of mine streaming continues into 2019, these four developments will continue to shape the industry as both stream sellers and stream buyers strive for ways to secure greater financial and economic benefits from these transactions.
ROBERT MASON is a partner and head of mining in Canada at Norton Rose Fulbright.