Streaming success: buying metals not mines

Historically, mining companies have been limited to either borrowing or selling equity to raise the millions needed to build a new mine – something that has become increasingly difficult for many of the sector’s smaller players.

But there’s a third option that has developed in recent years, and it started in Vancouver: precious-metals streaming.

Conceived 10 years ago by Silver Wheaton Corp. (TSX:SLW), streaming is a kind of arbitrage in which the company puts up large amounts of capital (up to $1.9 billion, in Silver Wheaton’s case) for the right to buy a percentage of a mine’s future gold or silver output. It’s becoming an increasingly important source of capital for junior miners.

“It’s an emerging method of mine financing,” said Silver Wheaton CEO Randy Smallwood. “Some of the majors are doing OK, but the mid-tiers and junior companies that have decent assets, they’re still hurting. They don’t have any equity support.”

Silver Wheaton’s streaming business has been so successful it has spawned new players, includingSandstorm Gold (TSX:SSL), another Vancouver streaming company started by former Silver Wheaton employees.

There are now four main players in the streaming space, the other two being Toronto-headquartered Franco-Nevada Corp. (TSX:FNV) and Royal Gold Inc. (Nasdaq:RGLD), based in Colorado.

B.C.’s newest mine, Mount Milligan, was financed in part through a streaming agreement between Royal Gold and Thompson Creek Metals Co. Inc. (TSX:TCM).

Royal Gold owns 52% of the copper-gold mine’s gold production, which Royal Gold can buy at US$435 per ounce.

Although both Sandstorm and Silver Wheaton are involved in streaming, their models are very different.

Silver Wheaton typically invests in large mining companies in which copper, iron or some other metal is the primary product and gold or silver are byproducts.

Silver Wheaton provides the mining company with the capital it needs to help it develop the mine in return for the right to buy all of the company’s gold or silver at a fixed price, usually for the life of the mine. Seventy per cent of its streaming assets are silver, 30% gold.

“Streaming allows … large companies to get rid of their non-core product and turn it into capital, which they can invest back into their core product,” Smallwood said.

Sandstorm focuses more on junior gold mines and has investments in Canada, the U.S., Mexico, Brazil, South Africa, Mongolia and Australia.

In 2008, Sandstorm CEO Nolan Watson left Silver Wheaton, along with another employee, to apply the streaming model Silver Wheaton pioneered to the junior gold mining sector.

Sandstorm has invested in 30 junior mining companies to date, 13 of which are now producing. One of the company’s investments was a writeoff.

“We had one of our assets go sideways on us,” Watson explained. Even so, the company ended 2013 with $100 million in cash and no debt.

With gold and silver prices tanking recently, both Sandstorm and Silver Wheaton have seen their short-term streaming profits decline. In the long term, however, the companies can negotiate more favourable agreements based on current lower prices, in the hope the prices will have rebounded when the mines go into production.

“The price of gold decreases our profit margins, which ends up decreasing the share price, but generally speaking we’ve set ourselves up well with cash on the balance sheet to be able to make investments in a depressed environment,” Watson said.

For Sandstorm, a typical investment might be $50 million for 10% of a mining company’s future gold production at $420 an ounce, which it then sells to banks for about $1,100 per ounce.

Silver Wheaton’s investments tend to be bigger.

Last year it made its biggest investment to date: $1.9 billion in Vale SA (NYSE:VALE).

That investment buys Silver Wheaton 25% of the gold produced at Vale’s Salobo mine in Brazil, for the life of the mine, and 70% of the gold from its mines in Sudbury for a 20-year period.

Since the streaming company does not own any equity, shareholders like the model because there is no dilution of company stock, and all the company is giving up is the profit on an asset that, to them, is just a byproduct anyway.

“This is the only form of mining transaction that happens in the entire investing space where it’s a win-win,” Smallwood said. “Both companies’ shares go up when a deal is announced.”

By: Nelson Bennett