JOHANNESBURG (miningweekly.com) – Persistent volatility in commodity prices has made it increasingly difficult for mining companies to access debt and equity financing, which is why more mining companies may be considering entering into metals streaming agreements, as opposed to seeking traditional forms of finance, law firm Fasken partner Brian Graves suggests.
Streaming, which is an agreement between a mining company and investor for the investor to buy a percentage of a company or project’s future production at a fixed price below market value, is increasingly becoming a notable part of a capital transaction, he said during a mining seminar this week.
The future production subject of the sale, known as a stream, is often the by-product of the company’s main operations, such as precious metals, which are the by-product of a base metal operation.
Graves explained that while traditionally used for precious metals operations, the streaming service has undergone a great deal of development and technological improvement over the last decade.
“It’s a growing area. And while it’s certainly not supplanting equity and debt as a means of finance, it is beginning to be a noticeable part of . . . the capital landscape for . . . mining,” he said.
Streaming agreements have expanded into the diamonds, battery metals, cobalt and even lithium mining sectors.
He described streaming deals as a “bespoke form of financing”, adding that it, along with royalty agreements, are contractual payments that are usually unsecured, but which are quickly negotiated and implemented.
The advantages of such agreements for miners include a speedy execution, while the upfront payment is not typically tied to restrictions regarding the use of funds. There are also a few loan covenants and obligations, while traditionally, no real security is offered.
Advantages to the investor, Graves explained, include a fast deal execution, access to a physical product, price arbitrage and delivery certainty. There are no capital calls on equity or dividend insecurity, he said.
Other key advantages include the agreement itself being less restrictive on the company compared with other traditional debt instruments, allowing the mining company to retain greater control over the project’s overall operations.
He elaborated that companies are afforded greater flexibility under streaming arrangements compared with traditional debt products, as the company is only obliged to deliver the product when it is produced.
One of the only key drawbacks associated with streaming, Graves said, is that the mining company may inadvertently price the streamed product too low, thereby failing to benefit from subsequent increases in its market value.
Or, if the mining company has agreed to sell a fixed percentage of the streamed product, the investor may receive a windfall where the mining company’s production is higher than expected or where new discoveries are made.
As a preventive measure, however, Graves suggested that mining companies may seek to cap the volume of the product to which the investor is entitled.
Additionally, he pointed out that, as a streaming transaction may entail offshore payments, it will require upfront written approval of an applicable financial surveillance department, with an application made through an authorised dealer, such as local commercial bankers.
Graves warned, however, that while metal stream contracts are, in theory, simple agreements for the purchase and sale of a commodity, a greater complexity lies in meeting the sometimes-competing tax, accounting and, where applicable, credit rating imperatives in the contract and the deal structure.