Big miners may balk on streaming as S&P changes tack

Thu Oct 24, 2013 2:37pm EDT

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(Reuters) - A change in the way ratings agency Standard & Poor's accounts for a novel type of mining project funding may drive big miners away from this cash source at a time when fundraising is already tight.

S&P said this month it will start classifying streaming deals - where miners get cash upfront in exchange for agreeing to sell future production of a by-product like silver or gold at a set price - as debt rather than as non-debt financing.

Until now, one attraction of streaming deals for large mining companies, many of which have high debt levels, was that ratings agencies did not view the transactions as debt.

The S&P revision, which other rating agencies have not followed, leaves big miners with streaming deals with less headroom for borrowing, unless they want to overload on debt and perhaps put their credit rating at risk.

It may dim expectations that financiers like Silver Wheaton Corp (SLW.TO) that provide streaming deals can boost business by wooing global mining majors after a breakthrough deal this year. These financial firms remain confident, however, of finding a workaround.

"Some CFOs who we are speaking to, they will pay attention to this, put that in the mix of what they are thinking about, and it may impact their decisions," said Paul Brink, senior vice-president of business development at Franco-Nevada Corp (FNV.TO), a Toronto-based stream and royalty company competing with Silver Wheaton, Royal Gold Inc (RGLD.O) and others.

He said ratings was just was "one of many" issues CFOs look at when deciding on a streaming deal.

Streaming finance has mostly been used by small and mid-sized miners especially after investors soured on the mining sector when lower metal prices and high-profile cost blow-outs on mine developments made it harder for firms to raise capital.

A few large companies did dip their toes into streaming. They include Goldcorp Inc (G.TO) in 2007 and Barrick Gold Corp (ABX.TO), the world's biggest gold producer, in 2009 to help fund its big Pascua-Lama silver and gold project.

Silver Wheaton's $1.9 billion gold streaming deal in February with Brazilian mining giant Vale SA (VALE5.SA) raised talk the world's biggest diversified miners were warming to the idea. Analysts tipped Rio Tinto Plc (RIO.L), BHP Billiton Plc (BLT.L) and Glencore Xstrata Plc. (GLEN.L) as possible candidates for streaming deals.

One source briefed by Barrick on the matter told Reuters that Barrick has been considering a further streaming deal to pay for any additional outlay at its suspended Pascua-Lama project on the border of Chile and Argentina.

The change in S&P's position could foil this plan, and put further pressure on Barrick, as the rating agency has already cut its corporate credit rating twice in the last 15 months.

BHP, Glencore and Rio declined to comment while Barrick, Goldcorp and Vale did not respond to requests for comment.

SPEED BUMP

S&P's move will put "a speed bump" in the rationale for big companies to do streaming deals, said a financial advisor who has been involved in streaming deals but asked not to be identified as he is not authorized to speak to the media.

"If the streams are treated as debt, why not just take on more debt? You might as well just go to a bank and borrow more money. Why do you have to go through this rigmarole?" he said.

Demand from small- and mid-sized companies for streaming finance is expected to continue. This part of the market is largely unaffected by S&P's move as only big companies that issue debt on public markets tend to have credit ratings.

S&P, which is part of McGraw Hill Financial Inc (MHFI.N), says it does not expect to change ratings on any of the miners affected by its revision, which came as it reviewed methodology due to the increasing number of streaming deals. Its change will apply to all new and historical streaming transactions.

Its methodology is "meant to bring comparability amongst competitors as well as recognize the economics of a given transaction," said Mark Solak, director of corporate ratings at S&P.

"In this case, we believe the economics of these transactions are more like debt," he said.

Other rating agencies disagree.

"There are certainly some debt-like attributions to streaming transactions but by and large we don't consider them debt," said Darren Kirk, senior credit officer at Moody's Investors Service, part of Moody's Inc (MCO.N).

Ernie Lalonde, senior vice president of mining at Toronto-based rating agency DBRS, said he did not view streaming deals as debt, partly because they have no interest payments.

SURPRISED AND DISAPPOINTED

Vancouver-based Silver Wheaton, the world's biggest streaming company, said it was "both surprised and disappointed" not to have been consulted by S&P ahead of its criteria adjustment, with which it disagreed.

"We would have appreciated the opportunity to work with S&P to clarify and, where possible, consider modifying the terms and conditions of streaming transactions that they considered implied a debt-like treatment," Chief Executive Randy Smallwood said in an emailed response Reuters' questions.

Smallwood and Franco-Nevada's Brink both expect demand for streaming deals to continue, not least because it is more flexible than traditional debt. There are no fixed payments and the upfront payment does not attract interest.

There is "ample opportunity to work with future potential partners to further fine-tune streaming agreements in order to achieve a desired outcome from a credit ratings perspective", Smallwood said.

(Additional reporting by Clara Ferreira-Marques in London and Euan Rocha in Toronto; Editing by Janet Guttsman and Andrew Hay)

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