Metals streaming is a financial option
In the face of one of the worst commodity and equity markets in recent memory, metals streaming has become one of the few financing options available for mining companies in Ontario.
While streaming has been with us for more than a decade, it rose to new prominence in 2015 as several major global mining players closed significant transactions involving some of the world’s most respected producing mines. While for many years considered to be a type of alternative mine financing, metals streaming has become “main stream.”
Metals streaming is essentially the sale by a mining company of part of its future production in exchange for an upfront deposit and an agreed fixed price per unit of production, often for the remaining life of the mine or at least for an extended period.
The stream is typically a by-product of the mining company’s core production (such as gold or silver from a copper mine), but it could also be part of the mining company’s core production (such as gold from a gold mine). The result is the mining company is able to raise significant capital on the basis of its future production.
This article will focus on three recent trends in the metal streaming sector, specifically: (i) the significant increase in the number and type of stream purchasers, (ii) the proliferation of buy back-rights, and (iii) a loosening of stream security as a response to issuers’ existing debt arrangements.
Over the last couple of years there has been a major increase in the number of parties focusing on acquiring metal streams. The industry had been dominated by a few players for almost a decade. But this has changed as a response to the combination of significant potential returns on capital from streaming transactions (especially in comparison to the lack of opportunities in the more traditional mining equity markets) and the availability to some of relatively cheap capital. As a result, private equity firms and pension funds now represent a large and growing percentage of the stream purchasers. One notable side-effect of this trend is that mining companies with world-class mines have negotiated improved streaming terms due to the competition on the buy side. We anticipate the continued crowding of this space as strategic mining investors look for profitable ways to deploy significant amounts of capital.
A buy-back right allows a mining company to re-acquire a portion of the disposed metal stream for a certain price during a specific period of time. While not a novel term in these types of transactions, issuers have been increasingly pushing for such rights. When negotiating the upfront payment, purchasers typically aren’t willing to pay mining companies for anything other than reserves. But because metal streams are often for a lengthy period of time, purchasers do particularly well when additional reserves are added to the life of mine from resources over time. Buy-back rights give issuers optionality to reduce the percentage of this upside that is being sold. The buy-back price can be either a specific amount negotiated at the time of the streaming agreement or a price based on a designated internal rate of return to the purchaser.
Loosening of Security
One of the key features of streaming transactions is the high level of security protection afforded to the purchaser, often similar to the security provided to bank lenders. While an extensive security package remains a cornerstone of most metals streams, there has been a recent trend whereby stream purchasers have been willing to take less security so that the stream is not classified as debt by Standard & Poor’s (“S&P”). In 2013 S&P diverged from the other rating agencies by classifying streams as “debt” if they contain certain debt-like characteristics, such as a high level of security or overcollateralization or cash repayment or payment acceleration in an event of default. A debt classification of a stream has the potential for triggering significant adverse consequences under an issuer’s existing debt package. In response to this issue, in 2015 there were a couple of major streaming deals that were unsecured or carried less bank-like security. While these exceptions were notable, they were also restricted to streams being sold by global mining companies in respect of world-class mines where the risk of default is much lower.
Robert Mason is a Partner, Norton Rose Fulbright.