Metals streaming transactions as a way to raise capital for development or acquisition financing is gaining popularity among African mining companies, says Baker McKenzie managing partner Morne van der Merwe and Banking and Finance head Wildu du Plessis.
They point out that such transactions are already popular in Asia Pacific, the US, Canada and elsewhere, and now, mining companies in Africa are 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 the same, they indicate.
“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 to secure the delivery of a fixed percentage of future production of a specific metal and then makes regular payments for each unit of metal or metal credits delivered, as stipulated in the contract, they explain.
The upfront payment is considered 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, Van der Merwe and Du Plessis add.
“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.”
While 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 is produced, they say.
In special circumstances, other arrangements such as a buy-back option can be used. This option can, 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 can also be used where the delivery of promised production is delayed and the streaming company is then compensated, they point out.
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 some of its interests, they add.
Moreover, because the transaction involves the mining company delivering a percentage of actual future metal production, the arrangements with regard 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.
Another benefit for 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.
Streaming transactions are nondilutive to shareholders and are 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 ensures that the failure of one mining company does not affect their portfolios.”