Glencore PLC (LON:GLEN) is among the world’s largest resource mining companies. Although Glencore is generally more focused on copper, zinc, nickel, and iron, as well as coal and oil, the company has decided to sell future gold and silver production from its mining operations in Peru.
This is known as a streaming deal. The streaming model has become increasingly popular as major miners struggle to service debts and cover operating costs. With a streaming deal, a smaller mining company pays a discounted price today for the right to future precious metals produced by the big company’s mine. In this way, both parties benefit from a streaming deal: the major miner gets cash immediately, and the junior miner secures an attractive deal.
Usually, the major miner will retain some amount of the production from the project being streamed, up to a predetermined number of ounces of output.
Digging Out of a Hole
Glencore and company CEO Ivan Glasenberg have embarked on an ambitious restructuring due to the sector-wide slump in mining. This downturn for commodities has hit the biggest, most highly leveraged mining firms the hardest.
Over the last week, shares of GLEN have fallen from about $105 per share to just $87/share. The company’s shares are up from their 52-week low below $67/share, but are still a far cry from its 52-week high above $318 per share. That’s in the neighborhood of a 70% decline in the course of a year.
In order to reach its debt-reduction and cost-reduction targets, Glencore has been aggressively selling off assets and cutting production. One aspect of this strategy has been engaging in streaming deals.
Late last year, Glencore sold future gold and silver production from its Antamina mine in Peru to Silver Wheaton (NYSE, TSX, SWX:SLW) in exchange for $900 million upfront. The deal will give Silver Wheaton 34% of future silver output (at 20% of spot price) up to 140 million troy ounces. After that, Silver Wheaton will receive 23% of the mine’s output of silver.
Glencore has indicated it wants to cut its near-term debt load from $30 billion down to $18 billion. Silver Wheaton is probably the most active mining company in securing streaming deals, planning $5 billion in such arrangements to take advantage of an industry on the brink.
More recently, Glencore inked a streaming deal with Franco-Nevada Corp. to sell future gold and silver production from its Antapaccay mine, which is also located in Peru. The CEO of Franco-Nevada, David Harquail, suggested that streaming deals are the direction that the new wave of mining companies are going. The business model is certainly more attuned to the current state of the mining industry.
The agreement between Glencore and Franco-Nevada is worth $500 million. It’s not the company’s first such arrangement, either: Franco-Nevada bought the stake held by Teck Resources (NYSE:TCK) in the aforementioned Antamina mine in 2014 for $610 million.
In total, Glencore has raised some $1.4 billion between the two streaming deals.
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.