Metals streaming transactions as a way to raise capital for development or acquisition financing is gaining popularity amongst African mining companies. Already popular in Asia Pacific, the US, Canada and elsewhere, mining companies in Africa are now turning to streaming to raise funds for their mining operations because the risks associated with economic and political uncertainty on the continent have made it increasingly difficult to raise funds in traditional ways. In the last year, one or two South African mining companies have successfully used this type of transaction to raise funds and a number of other African mining companies are exploring opportunities to do this.
It is common cause that volatility in the commodity sector has made it more challenging for mining companies to access the traditional forms of debt and equity and, as a result, by 2016 streaming had grown to represent roughly $19 out of every $20 raised in the royalty/streaming sector globally. This is because it is considered to be a good way to raise funds when market conditions are unstable and debt financing is difficult to secure.
In a streaming transaction, the streaming company pays an upfront payment, usually in cash, to the mining company in order to secure the delivery of a fixed percentage of future production of a specific metal(s) and then makes regular payments for each unit of metal or metal credits delivered, as stipulated in the contract. The upfront payment is seen as an advanced payment for future delivery of specific metals and is structured as a deposit, which is reduced as the metal is delivered. If structured correctly, the deposit may be considered to be deferred revenue rather than debt.
A typical payment structure then also involves monthly payments, which are usually the lesser of the fixed price and the prevailing market price. If the market price is above the fixed price, the difference is credited against the deposit.
Whilst the mining company’s obligations under a streaming agreement are usually unsecured, the streaming company may of course take security, in which event it is typically ring-fenced to the relevant project assets from which the metal(s) is produced.
In special circumstances, other arrangements such as a buy-back option could be used. This option could, for example, enable the mining company to buy back a portion of the production promised to the streaming company, usually for a fixed price in the form of a refunded portion of the deposit. Top-up deliveries could also be used where delivery of promised production is delayed and the streaming company is then compensated.
The ongoing monthly payments to the mining company, payable on delivery of the specific metal, as well as the obligation by the mining company to return any uncredited deposit to the streaming company at the end of the streaming agreement, incentivises the mining company to keep producing, even though it has sold of some of its interests. In addition, because the transaction involves the mining company delivering a percentage of actual future metal production, the arrangements with regards to the delivery of metals are structured in a way that mining companies are not pinned down to the production of a specified minimum quantity of metal by a specific date or to repay a fixed amount on specific dates (as one would have under a typical debt deal), which means the mining company’s own ebbs and flows in the production process are automatically taken into account.
The other primary benefit to mining companies is that it allows them to raise funds before production starts by capitalising on their reserves. Projects can be brought into production much more quickly without having to source other forms of funding. This transaction is non-dilutive to shareholders and is usually less restrictive than debt financing. It can also be seen as outside endorsement of a project, aiding its investment potential.
For the streaming company it is a way to invest in mining companies without having to be exposed to the operational risk. Streaming companies usually invest in multiple mines all around the world, this diversification ensure that the failure of one mining company does not affect their portfolios.
Other forms of financing that mining companies could consider when raising capital include debt financing, equity financing, asset sales and royalty financing. The table below outlines the advantages and disadvantages of these types of funding versus streaming financing.
The advantages and disadvantages of development stage financing for mining companies
|Stream financing||Royalty financing||Debt financing||Equity financing||Asset sales|
|Definition||The upfront payment, to secure delivery of a fixed percentage of future production of a specific metal||The rights to a percentage of revenue of a product/ service in advance.||Borrowing money from banks and other funders or issuing debt securities to the market||The sale of shares in an enterprise||The sale of non-core mining assets|
|Not dilutive to shareholder equity||✔||✔||✔|
|No fixed repayment structure||✔||✔||✔|
|No loss of operational control||✔||✔|
|Improves Internal Rate of Return (IRR)||✔||✔|
|Share of production/operating risk||✔||✔||✔|
|Opportunities for value arbitrage||✔|
|Common investment objective||✔|
|Loss of upside on non-core metals/ minerals||✔|
|Separate investment objectives||✔|
|Dilutive to returns on project (but may improve IRR)||✔|
|Limited royalty financing||✔|
|Dilution of shareholder equity||✔|
|Potential loss of some operational control||✔|
|Rigid payment structure with increased risk of default||✔|
|Requirement for hedging||✔|
|Reliant on investor appetite||✔|
|MiningCo has production/operating risk||✔|
|Only viable if non-core assets are high quality||✔|