A focus on streaming

Highlighting new issues and approaches
October 30, 2015

Introduction

This document provides a brief description of streaming as a means of finance,  explains the common structures used and highlights the benefits, risks and protections that exist for this approach to financing. It is aimed at investors, banks and corporations that are active in the mining and commodity finance market and are interested in exploring streaming.

What is streaming?

Streaming finance is raised by selling a right to a commodity (typically a by-product) in exchange for an up-front payment. A stream is distinct from a royalty as it creates a right for the purchaser to purchase all or a portion of one or more metals produced from a mine rather than, in the case of a royalty, creating a right to a percentage of revenue from the sale of production. Traditionally, streaming has been used in mining operations in which gold or silver was a by-product. The mine operator is able to raise significant capital by selling its by-product gold or silver production for an upfront payment and, in some circumstances, an on-going price contribution or tolling/refining fee, or continuing purchase of product over a period ranging across the life of the mine.

What are the benefits for the purchaser?

Streaming financing permits the purchaser to participate in the upside of increases in commodity prices while reducing downside risk by avoiding variations in operating costs. The purchaser is able to benefit from the growth of the mine operator without having any additional capital or exploration costs, other than the initial upfront payment and sometimes an ongoing purchase price contribution depending on market prices at the time of delivery. This often translates into significant value creation for the purchaser. The interests of the purchaser and the mining operator are also aligned as the by-product’s production is dependent on the mining operator’s core production.

What are the benefits for the mining company?

By selling a stream in a base or precious metal by-product, a mine operator is able to monetise the value of its non-core production. The upfront payment for the stream can be used by mine operators to either strengthen their capital structure by paying down debt or to continue growing their company, either through making acquisitions, furthering capital or production expansions, or conducting further exploration. Furthermore, where an additional contribution is to be made by the investor upon receipt of deliveries, an additional revenue stream is created to supplement the revenues of the core production sales. In short, streaming financing helps mining companies grow their businesses by offering a very attractive financing alternative to traditional sources of capital such as debt or equity.

Since a vast quantity of base and precious metals are produced as by-products of other base or precious metals production, there are numerous potential opportunities for further growth of this financing product. Of note, it is also possible to structure streaming financings for the funding of mine acquisitions, so that the advance payment (either separately or in conjunction with senior leveraged finance) is utilised for the purchase of a mine.

How is a stream priced?

The price that the purchaser pays for the future production stream is pre-determined in the agreement which ensures costs for the purchaser are fixed. Usually the upfront payment is determined with reference to market prices and the stage of development of the mining operator. Often the investor is required to provide a supplemental payment depending on the market price at the time of delivery, which results in the investor sharing the upside of increases in commodity prices. Once the upfront deposit is fully reduced, the purchase price is the fixed price per ounce payable in cash (at times with a small inflationary adjustment). This pricing model provides an attractive supply of future production for the purchaser, at a discount to market. For the operator, the sale of a stream is priced somewhere between an equivalent amount of debt and equity depending on the level of development risk to be taken by the investor, but the operator has benefited from the advance payment.

Common payment structure

Purchase payments Pricing
Advance payment Upfront payment
On-going purchase payments Until advance payment reduced to nil
  • Fixed price (lesser of (i) base price (discounted price) and (ii) reference price (such as LBMA))
  • Advance payment reduced by any amount reference price exceeds fixed price
Post advance payment paid down, remainder of term
  • Fixed price

Who uses it?

Traditionally streaming was mainly used by mining companies which have valuable by-product production such as precious metals, and who were seeking to leverage their non-core production. However its use is now widening.

As mines experience increasing difficulties in sourcing equity and debt,  companies are being swayed by the flexibility in the covenants offered in streaming and are increasingly using the structure for all or part of their primary product.

To date most streaming finance has been provided by specialised streaming companies. Streaming companies, such as Silver Wheaton, Franco-Nevada and Royal Gold, have been able to build significant balance sheets comprised of streaming and royalty investments in gold and silver mines.

In recent years, streaming financing has been offered by specialist commodity banks or end users looking to lock in supply of future production. In 2010, Norton Rose Fulbright advised Talvivaara Mining Company plc in respect of a US$335 million zinc streaming agreement with Nyrstar NV. This deal is a recent example of a near-operational mining company monetising significant value from its non-core zinc production whilst an end user was able to benefit from the surety of long-term supply of raw materials essential to its business.

Characteristics of streaming financing

Benefits for commodity producer Benefits for purchaser
Ability to raise substantial capital off the back of a by-product Pure upside to increases in the commodity price
Immediate cash flow Long term supply of product
Significantly reduced debt resulting in very strong financial position No ongoing capital expenditure or exploration costs, yet benefits from production and exploration growth
Minimal security (junior creditor) No environmental or reclamation responsibilities
Minimal covenants  
Maximum debt  
Disposal of assets  
Further encumbrances  
No parent company support  

What are the risks?

Depending on the stage of the financing, the purchaser often takes development risk on the mining operator’s ability to achieve production. Furthermore, the purchaser is exposed to price movements in the mining operator’s core production – any dramatic decrease in the core production’s price could cause the mine to be unprofitable, increasing the risk of the mine closing down. This would leave the purchaser without a stream, no matter how good the underlying pricing is for the stream commodity. Purchasers should mitigate this risk by conducting sufficient due diligence on the mining operator and the project to ensure that it is sufficiently robust to outlast any downward turn in metal prices.

What protection exists?

The extent to which a streaming investor requires security over the assets of the mining operators will depend on the stage of development of the mining project. Investors recognise that the construction phase of a mining project is the most risky phase and therefore will look to mitigate the construction risk by taking security, albeit second ranking to senior project finance lenders. Following completion of construction, streaming investors do not typically require security as they are happy to take production risk of the project.

What impact does this have on project financing?

Where a streaming investment is unsecured, the investment should sit well alongside project financing as it is typically concerned with a by-product (which is usually not featured in the lenders’ financial model) and, in some circumstances, will provide an additional source of revenue to supplement the main product revenue stream. Depending on the structuring of the stream financing arrangements, streaming investors may expect the project company’s delivery obligations to rank as an operating expense in any pre-enforcement cash waterfall.

Difficulties arise where the streaming investment is secured, particularly where the investment is made prior to project financing. In these scenarios, prior to the project financing, the streaming investor is first ranking. It is conceivable therefore that a mining operator may be held to ransom by an incumbent streaming investor who may well have agreed to be second ranking behind project financing lenders and then frustrates the incoming project finance lending arrangements by refusing to agree reasonable intercreditor arrangements. It is critical in these instances that the mining operator agrees bankable intercreditor principles as part of the streaming agreement with rights to terminate the streaming investment (in conjunction with the release of any stream security) in the event that the streaming investor fails to agree to sign an intercreditor agreement based on these principles.

How does it differ from prepayment financing?

Below is a summary of the key terms of streaming financing compared to prepayment financing.

Term Prepayment Streaming
Tenor Up to 3 years 4 – 25 years/life of mine
Commodity Primary commodity By-product
Price Market based Fixed (plus inflation)
Margin Akin to debt Akin to equity
Delivery/repayment Fixed delivery schedule Delivery only to the extent there is production
Security Limited first ranking security None or second ranking security
Parent support Guarantee

If pre-completion, parent company guarantee

If post completion, no parent company guarantee

Representations Full debt reps and warranties

Limited to:

  • existence and authority
  • owns the mine, plant and equipment
  • no security over mining rights other than PS
  • no litigation etc.
  • compliance with laws
  • no other royalties or supply contracts
  • mining process produces the by-product
Positive covenants Full debt covenants
  • maintain corporate existence
  • maintain the concession in good standard unless it is not economical to mine
  • operate as would a prudent mining operator
  • make decisions based on the primary metal being produced with the secondary metal as a by-product
  • maintain insurance
  • Representation may be more extensive or expected to mirror those of any SPA where stream is part of a mine acquisition financing
Negative covenant

Limitation on:

  • further indebtedness
  • disposals
  • granting security
No security over the mining rights, aside from senior secured project financing
Suspension (non-force majeure) Not possible Up to 2 years, may even be uncapped
Event of default Full debt events of default
  • suspension for more than 2 years, suspension or close rights may be unlimited and without default
  • non-delivery when delivery obligation crystallised
  • insolvency
  • breach of rep or covenant
  • (cross acceleration may be sought/security enforcement)