As the challenging environment for mining sector financing continues, streaming transactions are playing a prominent role in bridging the “financing gap”. Traditional equity, debt and project finance markets have not been available to mining companies to the extent they have been in the past. Mining companies have had to become more creative in financing the development of their projects and their M&A transactions—and they have increasingly turned to streaming transactions as a catalyst to help secure an overall financing package.
A streaming transaction is an agreement whereby a financing party agrees to purchase future deliveries of minerals from an identified property in exchange for a significant up-front advance payment, referred to as a “deposit”, which is applied against future deliveries, typically together with additional ongoing fixed payments (which are a portion of the market price) as the minerals are delivered. The transaction is essentially a long-term commodity purchase contract at pre-agreed prices with the delivery obligations contingent on future production over a specified period or for the life of mine. The financing party obtains exposure to mineral prices and the ultimate size and grade of the underlying resource, but not construction or production cost risks. Like a senior lender, the financing party normally takes security over the project assets and related subsidiary companies to secure the performance of the obligations under the streaming agreement. Streaming transactions are typically based on the production of precious metals, whether as the main output or as a by-product of a base metals project; however, the streaming model can also be used with respect to other commodities. Basically a hybrid transaction structure with both secured debt and equity-type participation characteristics, stream financing arrangements are highly customizable to fit the specific needs of a particular mining company, a particular project and the related financing requirements.
Streaming transactions are used by mining companies to finance resource development and the acquisition of new resource assets and to monetize a portion of the value of existing assets. Major streaming transactions in recent years have included Inmet Mining’s US$1 billion precious metals streaming agreement with Franco-Nevada for the development of its Cobre Panama mine and Vale’s US$1.9 billion precious metals streaming agreement with Silver Wheaton in connection with its Salobo, Brazil and Sudbury, Canada mines. In addition to these large deals, streaming transactions have been completed in smaller amounts, including some transactions valued in the several millions of dollars. Financing parties have historically been the major streaming companies such as Franco-Nevada, Silver Wheaton, Royal Gold and, more recently, Sandstorm. Increasingly, other players, such as major pension funds and mining-focused private equity firms, are becoming active participants.
In 2014 there have been several examples of streaming transactions forming a key part of a multifaceted financing package for M&A transactions and project development. Stream financing has been filling the gap created by the challenges of raising sufficient traditional equity, debt and project financing.
In February 2014, Klondex Mines completed its US$83 million acquisition of the Midas mine and related ore milling facility from Newmont Mining, which transformed Klondex from an explorer to a producer with fully integrated operations. The acquisition and related expenses and debt repayment were funded through a C$42.6 million equity private placement, mezzanine debt in the form of C$25 million principal amount of 11% secured notes and a US$35 million streaming and royalty arrangement with Franco-Nevada. The Franco-Nevada financing arrangement included a prepaid gold stream requiring the delivery of 38,250 ounces of gold over five years and separate 2.5% net smelter return royalties on Klondex’s Midas and Fire Creek properties to take effect following the completion of the fixed gold deliveries.
Stream financing has been filling the gap created by the challenges of raising sufficient traditional equity, debt and project financing.
Stream financing from a non-traditional stream investor played a prominent role in Osisko Mining’s proposed partnership with Yamana Gold as an alternative to Goldcorp’s original C$2.6 billion unsolicited takeover bid. The proposed transaction with Yamana was supported by C$550 million of new financing from La Caisse de dépôt et placement du Québec (the Caisse) and the Canada Pension Plan Investment Board. The contribution of the Caisse was a C$275 million gold stream to acquire 37,500 ounces of gold per year from Osisko’s Canadian Malartic mine. The stream commitment included a repurchase and put clause that would have provided the Caisse with a guaranteed minimum return of 8%. The financing transactions were ultimately not implemented as Osisko entered into a different business combination agreement with Yamana and Agnico Eagle Mines as a response to a subsequent improved unsolicited offer from Goldcorp.
First-of-its-kind stream financing based on diamond production has been proposed as a significant portion of a C$944 million comprehensive financing package to permit Stornaway Diamond Corporation to complete its Renard diamond project in Quebec. The financing package consists of equity financing, senior and mezzanine debt facilities, separate cost overrun credit facilities and a US$250 million diamond stream financing to be provided by the Orion Mine Finance Group and the Caisse. Under the stream financing, the stream buyers will purchase a 20% undivided interest in the diamonds produced from specified portions of the project.
Certain key issues often encountered in structuring and implementing stream financing agreements are described below.
The manner, timing and conditions for the payment of the deposit by the stream financer are key areas of focus. The deposit may be paid in a single lump sum or by way of installments based on the satisfaction of certain conditions or on the contribution of certain other financing. In most cases, the stream financer seeks to ensure that its contribution is “last dollar”—i.e., once the deposit is advanced, the project will have sufficient financing to reasonably assure completion. Stream financers rely on deliveries of commodities based on the production of the mine for its return, so they are particularly focused on the risk of project non-completion.
Streaming agreements usually provide for two types of remedies depending on the timing and nature of a breach. In certain circumstances, the remedy may be a refund of the deposit plus interest; in other circumstances, the remedy may be a payment of the greater of that amount and the present value of the remaining mineral deliveries under the stream. These variable remedies reflect the fact that a stream is different from a loan in many respects and allows the financing party to benefit from commodity price and mining project upside potential.
In many cases, stream financing transactions are implemented in conjunction with existing credit facilities or new credit facilities arranged as part of an overall financing that includes the stream. In either case, intercreditor issues need to be addressed as the stream financing and credit facility will likely share the same security package. The stream financing will most often rank behind the credit facility, but there are situations where it may rank equally. A stream financer relies primarily on the mineral stream for the return on its financing and therefore will usually seek provisions allowing for stream deliveries to continue in all circumstances where the mine is operating (even when there is a default under the senior facility) and for any realization process to ensure that the mining assets are sold as a whole to allow operations to continue and the new owner to acknowledge the obligations under the stream. These and related issues are often fundamental for both the stream financer and credit facility lender and should be addressed as early as possible in the transaction process.
Operators seeking stream financing often have joint venture partners with a minority interest in the underlying asset. In these cases, it is necessary to have the joint venture partner agree to and participate in the stream transaction, or to structure the transaction so that it affects only the majority interest of the operating partner.
Stream financing transactions are typically quite sensitive to tax, and pricing is based on specific assumed tax treatment. As a result, careful planning, often on a multijurisdictional basis, is needed when structuring the transaction. Transaction agreements also need to address the issue of how a change in tax treatment will be handled.
In 2013, Standard & Poor’s announced that it would start taking a closer look at streaming transactions, with the possibility of classifying the transactions as debt for the purposes of ratings analysis depending on specified transaction characteristics. This has focused larger mining companies on the credit rating implications of streaming transactions and certain adjustments to the structure to avoid potential debt characterization.
As financing challenges continue to impact many mining sector participants, we expect that streaming transactions will both continue to have a strong presence in the sector and evolve in tandem with other creative financing solutions.
To discuss these issues, please contact the author(s).
This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
For permission to republish this or any other publication, contact Janelle Weed.
© 2018 by Torys LLP.
All rights reserved.