Recent global uncertainties have impacted the metals and mining industry and as a result, it has become more difficult to obtain financing from traditional sources for the exploration and development of mineral projects. As a result, companies have been exploring a number of alternative financing methods, including metal stream financing, royalty financing and joint ventures.
Metal stream financing involves a long-term metal purchase and sale agreement between the financier and a mining company. In a typical streaming agreement, the financier provides the mining company with an upfront payment, or deposit, in exchange for the right to purchase at a fixed price a future stream of metal that will be produced from the applicable mining property. The agreement may pertain to the purchase and sale of a byproduct metal rather than the primary metal produced. The upfront deposit may be provided either all at once at closing or in stages as development objectives are reached.
The financier also makes ongoing payments for the metal that is produced and delivered to the financier. These payments are pre-set and the standard is for the financier to pay the lower of the fixed price set out in the agreement (intended to be substantially less than the market price) and the market price at the time of delivery. The difference between the market price and fixed price is credited against the upfront deposit until it is reduced to nil. Thereafter, the difference is the financier's profit. Streaming agreements are generally created to last the life of the mine.
There are a number of advantages of metal stream financing for both the financier and the mining company. Apart from the upfront deposit, no payments or deliveries are required by the parties until production begins. The financier benefits by receiving metal for less than market value for the duration of the streaming agreement, while the mining company is able to secure upfront and possibly ongoing funding for the mineral project.
Since the financier's role is limited to providing financing for the project, it is not responsible for any production or operating costs of the mine. This structure allows the mining company to generally retain control over the project's overall development and operations. Metal stream financing is also beneficial to the mining company as it is not dilutive to shareholders and it is project-specific.
Royalty financing involves the financier's one-time upfront provision of capital to the mining company in exchange for a royalty entitling it to a share in the future revenue of the mine. Royalty financing arrangements most often take place in advance of mine construction or expansion. The financier may receive its payments by way of sales proceeds or in the form of the metal itself, and the payment rate is based on the value of the mined product.
Some of the benefits of royalty financing are similar to those of metal stream financing. The financier is not required to contribute to production or operating costs but can still benefit from the exploration and development of the mine. The mining company generally retains control of the project and the royalty arrangement is nondilutive to shareholders. The mining company is usually not required to make any payments until production has been established. Note that in royalty financing agreements, the entire payment is made up front, which is beneficial for the mining company but less so for the financier.
Joint ventures are arrangements in which two parties pool their resources to undertake a specific task, typically for a limited period of time, and may provide a third source of financing for mineral projects. In the mining context, generally a junior mining company that lacks capital will partner with a major mining company to explore, develop and operate a target mine or mineral project.
Recently, a number of joint venture agreements have been reached between Canadian mining companies and international or foreign state-owned companies. The degree to which both parties jointly manage the project can vary widely, depending on the circumstances and the desired outcome. The terms of the joint venture agreement will address the ratio of control between the parties and the major mining company's financial contribution, as well as other issues such as the inclusion of minority protection provisions.
There are both advantages and drawbacks to joint venture financing of mineral projects. Most importantly, the junior mining company benefits economically from the arrangement, as the parties share costs and direct financing may be obtained from the major mining company. The major mining company may also lend resources, expertise and experience, along with more credibility to attract potential third-party lenders. The joint venture is also beneficial to the major mining company because it allows for participation in a project that involves less development and operational risks.
The main drawback for the junior mining company is that it is unable to retain full control over the project.
Metal stream financing, royalty financing and joint ventures are three alternative financing methods that should be considered by companies interested in exploration and development of mineral projects. Each may be adapted to a variety of circumstances, allowing both financiers and mining companies to establish an arrangement that meets their interests and expectations.
This article was originally published in the Summer 2013 issue of Canadian Mining Magazine.
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.