Will Streaming Deals Revolutionize Precious Metal Mining?

January 12th, 2016 by

The notion of the “streaming deal” or “streaming agreement” in the precious metal mining industry has become increasingly common over the last few years. Due to its newfound prevalence, this new business model in the precious metal mining sector is worth evaluating.

What are Streaming Deals?

streamingEssentially, two firms will enter into a partnership where one party handles the “dirty work”—actually mining the metals—while the other offers capital or assets up front. (Typically, one company will “lease out” its mine to another.) In exchange, the latter party receives royalties from the use of its mine. These royalties are usually transferred in the form of “metal streams”: streams can either be a portion of the metal mined or the cash value thereof.

When such an arrangement is wisely pursued, it can be profitable for both companies involved. Some firms such as Silver Wheaton Corp. (NYSE, TSX, SWX:SLW) even specialize in being the streaming partner with several different miners.

Year of Streaming in Precious Metal Mining

Last year was truly the emergence of metal streaming, although this set-up has occasionally existed in the precious metal mining industry in the past. Nonetheless, 2015 saw a record-high number of streaming deals between companies involved in mining gold, silver, and copper.  (Although copper is not exactly a precious metal, gold and silver are often recovered as a byproduct of copper mining.) According to analysts at Palisade Capital, “The number of [streaming] transactions doubled from 11 to 27 year-over-year, with the dollar values associated tripling from $1.1 billion to over $4.0 billion.” This is shown in the chart below.

streaming_dealsStreaming agreements between miners also allow the two parties to settle on financial terms that work for both them (and would’ve been impossible to properly finance on their own). To be certain, part of the motivation for entering into streaming deals is out of utility: over two-thirds of mining projects currently experiencing or at risk of cost overruns. This industry-wide dynamic means that even the major players in precious metal mining are forced to creatively restructure their finances if they’re going to survive.

goldmineFor instance, the world’s tenth-largest company (of any kind), Glencore PLC (LON:GLEN), has turned to selling some of its future mine production in streaming deals as a mean to improving its increasingly leveraged financial position. Glencore had actually just expanded its operations by merging with Xstrata (an energy resource company) right before the plunge in commodity prices hit, so the newly-merged firm was in an especially debt-heavy position.

Enter Silver Wheaton, the industry model of sorts for streaming. Silver Wheaton and Glencore teamed up for the biggest streaming deal of the year ($900 million), announced late in 2015. With aligned interests, streaming made perfect sense for both firms.

Meanwhile, a quick look at the graph below shows that Franco-Nevada (NYSE, TSX, SWX:FNV) and Royal Gold (NASDAQ:RGLD), two of the biggest streamers in the business, far outperformed a group of regular precious metal miners.

precious metal mining palisade_capitalThe truth is that you can monetize streaming or royalty models in just about any business (provided you’ve got the right access and advice from merchant bankers at your disposal). The arrangement makes particular sense in the precious metal mining industry at the moment, so expect to see even more of these kinds of models across the sector in 2016.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.