Some words of wisdom imparted by one of the most successful mining promoters of the present day, at a speech to a recent mining conference, when describing what investors should look for in a mineral investment is “avoid companies with streams.”
This did refer to projects with watercourses running through their properties, but to “pre-finance” deals that some mining companies did to fund mine development, variously called “precious metals streams” or “metal purchase agreements.”
In such deals, a capital provider extends an amount of money to the mining company, normally but not always, when the project is close to production, as part of the finance package to get the mine built. The funding company then has the right to buy, at a fixed price which is very low, an agreed amount of the output of the mine, for a period of time.
For example, such a deal may entail the delivery, for the life of the mine, 15% of the gold or silver produced, at a price of $400 an ounce for the gold, and/or $5 an ounce for the silver. Since mines don’t produce 99.99% purity metal (that only comes from refineries) that is traded, the normal process it to get the gold or silver value from the sale of the unfinished gold ingots mines produce, which are anywhere from 90% to 95% precious metal.
This funding mine funding is provided by specialist funds, such as Franco Nevada, Sandstorm and Orion Mine Finance, among others. Earlier this year Orion disposed of most of its stream portfolio to Osisko Royalties for $1.1 billion. These, for investors, have been extremely lucrative deals, but the question is, are they zero sum games, where one winner creates a loser, or can both parties win in these sorts of transactions?
There is no simple, straightforward answer to that question. While it may sound like something of a “cop out” the real response is that it depends on the details of the specific deal.
Recent large scale projects include streams that are part of elaborate financing packages, which may include debt, leasing and sometimes equity as well. Large projects from large companies are in a better position than small, single project companies, to evaluate the full cycle costs of financing. It a project so encumbered still meets the mining company target returns, it can be viewed as accruing value to the company – the stream is simply a cost of finance.
For smaller companies, the answer is more nuanced: if a company “gives away the store” to get fund to build a mine (a Canadian miner, some years ago, did such a stream on their silver production, and it virtually destroyed the economics of the project, leading to mine shutdown, renegotiation of the stream and giving streams a large part of their dicey reputation) the results are unlikely to be pretty.
But, if properly agreed, the streams may simply be the difference between a project being built and not being built, and while a stream will effect the economics of the project, but not automatically damage it.
As a rule, the grade of the material being mined is a good indicator of the “stream carrying” capacity of a project. Low grade bulk production is more likely to operate on a tighter margin than higher grade material. The stream will impact the margin, so a “robust” margin is more likely to be able to afford a stream on the material. Another guide is how much of the economics of a project depend on the revenue from a stream. If, for example, a copper project which is comfortable with its copper revenue also produces some gold, encumbering some of the gold revenue to get non-dilutive finance may be a good trade-off. Similarly, a lead-zinc project that can stand on its base metal income, but also has byproduct silver, may gain by putting a stream on its silver.
The bottom line is, while one hesitates to disagree with someone like the successful mining promoter mentioned at the start, someone who has made himself and his investors very good returns over a long career, there is a temptation to wonder if stream and royalty finance is not simply another finance tool, neither better nor worse than traditional equity/debt deals. A properly negotiated stream need not destroy value, and this can be a “win-win” rather than a zero-sum game.
Michael Colligan,
Partner – Private Equity / Natural Resources