Brazil: Streaming Arrangements: A Mining Project Finance Alternative

Last Updated: 24 April 2013

Article by Adriano Drummond Cançado Trindade and Graciema Amaral de Almeida1

The structuring of legitimate business transactions may often face obstacles in legal restrictions, which set hurdles or even prevent their implementation. This is especially the case of the so-called "atypical contracts," in which case the absence of specific legal provisions may present difficulties, particularly when these entail an international flow of currency and goods, thus triggering foreign exchange effects. However, once the regulatory issues are resolved, these innovative structures may be good alternatives to stimulate certain economic sectors.

This is the case of streaming arrangements, which are contracts for ongoing supply of mineral production under which, upon advance payment of a premium, the buyer agrees to purchase, at a fixed, discounted and predetermined price, all or part of the mineral production to be extracted by a mining company during a certain period or even throughout the life of the mine, until the mineral deposit is depleted. The mining company receives an upfront payment, which enables it to develop, construct and operate or expand the mine. This arrangement allows the mining company to capitalize on the basis of proven but still unexplored mineral reserves at a cost usually below that of loans.

Streaming transactions have become more frequent in the mining sector, as they benefit the mining company, which may avail itself of an additional fundraising mechanism to develop its mineral project and will have a practically certain purchaser for all or part of its future production (depending on the agreement). Moreover, contrary to capital investment financing, streaming arrangements enable mining companies to minimize their risk of dilutions to shareholders and avoid debt financing costs, particularly at times when credit access conditions are unfavorable.

Streaming transactions may also benefit the purchaser in a scenario of increasing commodity prices, as it will be able to freeze the price of a future mineral purchase tending to escalate, and resell such product at market price. Similarly to financial derivatives, streaming arrangements fix the mineral price, avoiding the purchaser's exposure to possible upward market price movements. Differently from hedge transactions, however, streaming transactions usually contain a provision that payment to the purchaser will not be made at a predetermined price but rather at the lowest between market value and the amount agreed per production volume. Because of these specific features, purchasing companies that adopt the streaming model have reported high return rates, particularly when the mine's total production exceeds initial expectations.

Naturally, streaming transactions involve certain risks, which must be assessed. One of them is the possibility of the production being none or insufficient, preventing the seller from delivering the mineral as agreed. Purchasers reduce their exposure by demanding guarantees traditionally offered to financial agents in financing transactions. Another risk is market volatility, as oscillations may affect the profit margins originally envisaged by the purchaser and ultimately render production and, consequently, streaming itself, impossible. This is a well-known risk in the mineral sector that calls for adjustments to market movements by mining and streaming companies alike.

There are still legal risks, often created by legislation that fails to properly regulate the practice of streaming. Because of the lack of proper regulation for this type of transaction, one of the major hurdles to execution of streaming arrangements between a Brazilian mining company and a foreign streaming company is the absence of a specific foreign exchange classification that would enable registration of the upfront payment made by the purchaser to the seller, as a premium, in the Central Bank of Brazil (BACEN) electronic system for Financial Transactions Registration (ROF). In recent cases, however, a BACEN precedent has been adopted, enabling the closing of foreign exchange transactions and the inflow of funds.

Other aspects that still need a more accurate regulatory framework involve taxation of the premium paid by the purchaser to the seller, given that the legal nature of this premium may generate discussions, which will have tax effects, and that the volume of the production to be sold in the future is uncertain, as mineral deposits are usually reassessed during the mining operation. Within this context, a clear definition of the possibility of the premium amount being taxed throughout performance of the agreement – and, consequently, throughout production – would contribute to making streaming more attractive to Brazilian mining companies.

Finally, because streaming agreements entail a commitment to sell all or part of the production of a mine to a purchaser, legislation should also make possible registration of this type of agreement with the National Mineral Production Department - DNPM in order to protect the rights of the purchaser and of third parties with which the mining company may trade.

Be that as it may, the credit restrictions recently faced by the mineral sector and the hike in the prices of certain minerals, such as gold, are turning streaming arrangements into a good alternative for investors that trade in gold and some other commodities on the international market, as well as for Brazilian mining companies seeking financing for their projects. Although the gaps in Brazilian regulations are not sufficient to render this type of transaction unfeasible, improved regulations would eliminate unnecessary legal risks in streaming agreements.

Footnote

1. Counsel and Associate, respectively, at Pinheiro Neto Advogados.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.