Stream financing is increasingly becoming a crucial third leg in how mining transactions are bridged, as highlighted by Lundin's recent $1.9-billion purchase of the Freeport-McMoRan copper mine in Chile.
The deal, which closed Nov. 3, involved a $600-million equity financing, a $1-billion high-yield note, and a $650-million stream financing with Franco-Nevada Corp.
It is the second largest Canadian mining deal this year, trailing the mammoth $4-billion deal that saw Yamana Gold and Agnico Eagle Mines acquire Osisko Mining Corp.
It is also the latest mining deal to close that required a critical component that is becoming a mainstay of mining transactions: stream financing.
Stream financing, similar to a forward contract, is an agreement where a financing party provides capital up front in exchange for future deliveries of minerals, with ongoing payments being made at agreed-upon prices (below market) as those assets are delivered. The streaming company pays nothing toward capital or exploration costs. It is a financing vehicle that has become an important part of a mining sector where rough equity markets have dried up financing.
“Certainly in many of the large deals happening currently, streaming financing figures very prominently in transaction planning and the capital-raising process simply because it's been so difficult to raise the regular sources of capital on their own,” says Michael Amm, a partner at Torys LLP who works on many streaming and royalty transactions.
Amm adds that, where before there was a lot of equity capital to raise and debt with relatively low interest rates, nowadays the lack of those options has increased the need for streams.
“I think the renaissance of streaming is being driven now by the lack of capital alternatives to finance acquisitions and projects in this market. Certainly in our experience in 2012 and onwards, we've seen a significant pickup in the amount of streams — and not just in the amount but in the prevalence of streamers.
“If you look at the transaction processes that have been ongoing, streamers have been figuring continuously in a prominent way; in a way that wasn't always the case if you went back four or five years ago.”
Streaming has allowed mining companies to focus on its core assets while selling non-core assets, all while bridging the gap between equity and debt, a structure that Mark Bennett, a partner at Cassels, Brock & Blackwell LLP who worked on the Freeport deal, says had much to do with creativity.
“If you look at mining now, the creativity on the side of having the sale of the non-core piece of the asset, which was the metal stream, bridged the gap in between what you could do in equity and what you could do with debt,” he says. “So you kind of kill two birds with one stone: you bridge the gap between equity and debt and you get full value for part of the asset that is non-core to your business.”
Because streaming requires the selling of a company's production up front at possibly a deep discount, bigger companies with adequate financing may look at other funding vehicles — but this is not always the case.
On Aug. 20, 2012, for example, Inmet Mining Corp. agreed to a stream deal with Franco-Nevada that saw the latter commit US$1 billion to Inmet's share of the costs to develop the Cobre Panama copper project. Earlier that month, on Aug. 8, Hudbay Minerals entered into a stream agreement with Silver Wheaton, the largest silver streaming business, where the latter would acquire 100 per cent of the life of silver production from the former's Constancia project.
In most cases, stream financing would bridge the gap after equity and debt commitments are in. “Typically it's a smaller component of the overall financing,” says Stuart Breen, a partner at Lawson Lundell LLP. “Often, projects cost billions to build. The streaming component may be in the hundreds of millions, or a portion of that. So it can be a very significant piece of the financing picture, but most commonly it's a smaller part.”
In some cases, however, stream financing can become the bulk of the financing in an acquisition. Take Teranga Gold Corp., for example. In December 2013, the company entered into a US$135-million stream financing agreement with Franco-Nevada in order to acquire the remaining interest in the Oromin Joint Venture Group Ltd. and allowed Teranga to retire half its bank debt.
Or take Thompson Creek Metals Company Inc., where in July 2010 it acquired Terrane Metals Corp. after entering into a stream transaction in which Royal Gold purchased 25 per cent of the life of the gold production from Terrane's Mt. Milligan Copper Gold Project — enough to finance the acquisition.
When a stream financing is used in an M&A deal, the acquirer will get financing for the acquisition from the streaming company (the third party) in exchange for the products – often by-products – of the mine.
These transactions show that stream financing is not only an important method by which mining companies can attain much needed capital, but it also shows the malleability and range of these innovative financing vehicles.
Breen says streams are becoming increasingly flexible and cover more than just a particular interest. “The use of streams is definitely expanding, covering new commodities and being done in different kinds of projects and different types of interests in projects than ever in the past,” he says. “So while they used to have a fairly narrow range of application, it's getting much broader and I think it will continue to.”
And while streaming companies want to ensure that all other sources of financing are satisfied before investing in the project, Amm says streaming companies may become more involved at the outset of financing arrangements as well.
“They will be speaking with streamers right at the beginning of the process, recognizing that often they are the cornerstone of whether they are going to be able to put together an overall financing package that will work.”
With mining coming off a bad year in 2013, and with dwindling confidence, Breen says streaming may provide added assurance that some assets will be afforded some investor attention.
“If you involve a streaming company, it can be seen as a real vote of confidence on the part of the project because if they [well-developed streaming companies] are willing to do a stream on a project, it can be an important part of the overall financing of the projects because it can assist in getting more conventional project financing as well.”