Metals streaming has been an important mine financing tool for more than a decade. While viewed as a niche alternative for most of that time, it has risen in prominence over the past few years as mining companies have increasingly turned to metals streaming to fund their development.
In 2015, we witnessed a fundamental shift in the universe of stream sellers as several global mining companies sold streams on some of the world’s most respected producing mines.
Barrick Gold, Glencore, Teck and other majors turned to metals streaming to raise funds by selling slices of their production from core assets to help de-lever their balance sheets. In the process they brought metals streaming into the forefront of mining finance.
Up until that time streams tended to involve less senior issuers or less advanced projects. We expect to see more streaming transactions in 2016 by leading producers on their key assets as debt reduction remains a top priority.
There has also been a significant change in the universe of stream purchasers.
The industry had been dominated by a few financial players since the inception of streaming. But this has recently changed in response to two main factors – the potential for significant returns on streaming deals (especially in comparison to the lack of opportunities in the more traditional mining equity markets); and the availability to some purchasers of historically cheap capital.
As a result, private equity firms, pension funds and other private investment companies now represent a large and growing percentage of the stream purchasers as they search for profitable ways to deploy their considerable capital.
In an effort not to miss out on an opportunity, leading investment banks are also closely monitoring the streaming sector to determine if there is a profitable and low-risk way in which to deploy their own capital. Interestingly, the increased competition on the buy side has helped the more senior mining producers with low-risk projects to negotiate markedly improved streaming terms.
We anticipate continued crowding of this space as investors look for profitable ways to participate in the mining sector.
Another notable trend in streaming is the return of the buy-back right.
A buy-back right allows a mining company to re-acquire a portion of the metal stream that it sold for a certain price during a specific period of time. While not a novel term in these types of transactions, issuers have been increasingly pushing for, and securing, buy-back rights as a way of limiting the project upside they are selling.
When negotiating the upfront purchase payment in a streaming deal, stream buyers are typically only willing to pay for the stream to the extent it applies to a project’s mineral reserves. But because most metal streams have an initial term of at least 40 years, purchasers do particularly well when additional reserves are added to the life of mine from resources over that time.
Buy-back rights give issuers the option to reduce the percentage of the upside being sold by allowing them to buy back a portion of the stream. The buy-back price can be either a specific amount negotiated at the time of the streaming agreement or a price based on a designated internal rate of return to the purchaser.
We expect to see the continued importance of buy-back rights, especially in light of the more crowded competitive buyers’ market.
A key feature of streaming transactions for the past decade has been the high level of security protection typically afforded to the purchaser, often similar to the security provided to bank lenders.
While an extensive security package remains a cornerstone of most metals streams, there has, however, been a recent trend whereby stream purchasers have been willing to take less security so the stream is not classified as 'debt' by Standard & Poor’s (S&P).
In 2013, S&P diverged from the other rating agencies by classifying streams as debt if they contain certain debt-like characteristics, such as a high level of security or overcollateralization or cash repayment or payment acceleration in an event of default. A debt classification of a stream can have the potential for triggering significant adverse consequences under an issuer’s existing debt package.
In response to this issue, there were a couple of major streaming deals that were unsecured or carried less bank-like security. While these exceptions were notable, they were also restricted to streams being sold by global mining companies for world-class mines where the risk of default is much lower.
5While we expect security to remain a key feature of these transactions, the security will likely continue to be structured with the S&P guidance in mind.
Many mining companies are finding it difficult at current commodity prices to both satisfy their debt obligations and fund their development or sustain mining costs. Some companies will be forced to restructure their debt in order to continue as a going concern.
We expect to see a lot more activity in 2016 around stream restructurings.
Most streams are secured against the relevant projects and in many cases have senior security with respect to the commodity that is the subject of the stream itself. So as mining companies strive to refinance or restructure debt, some stream owners will likely find themselves at the centre of complex restructurings and inter-creditor negotiations with significant investments at risk.
Some stream owners may need to decide whether they would prefer to own a distressed project or take a haircut on their streaming economics. The lessons and law that flow from these restructurings will affect the form the next generation of streaming deals will take.
In addition to streaming, there remains a lot of activity in mining offtake transactions.
Offtakes have been an integral part of the mining industry for decades, allowing mining companies to sell some or all of their future production at negotiated prices. That being said, the offtake market has changed significantly in recent years.
While previously dominated by a small group of strategic purchasers, in particular, commodity traders or entities with smelters or other processing plants, we now see offtakes frequently purchased by a new and broadening group of private equity financial players.
This influx of new financial offtake purchasers has resulted in a number of changes to the traditional terms of offtakes, especially in the definition of price or market price. Negotiating these terms pose a new risk for miners Looking to maintain project upside.
Mining sector royalties are also undergoing a renaissance.
No longer just an ancillary feature on a project, royalties are quickly becoming an important tool for mine financing.
There has recently been a significant increase in the number of new royalties being created and sold as part of comprehensive financing strategies by developing mining companies. Moreover, there is also a trend towards purchasers demanding royalties be formally secured against the relevant project rather than just relying on the notion that they 'run with the land'.
We expect to see further innovations in mining royalty structures in 2016 and 2017 as companies continue to search for resources to advance their projects.
The future of alternative mine finance will depend in part on the health of the traditional mining equity and debt markets. If these markets remain closed for many mining companies then we expect to see continued proliferation and change in streaming and other such tools in the years ahead.
*Robert Mason is a partner in the Toronto office for global law firm, Norton Rose Fulbright
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