Alternative form of mine finance seen boosting tepid M&A
VANCOUVER (Reuters) - A funding technique mostly used to help companies build new mines is moving into the mainstream as a way to pay for acquisitions and could help boost industry deal volumes that have fallen for the past three years.
Stream financing, through which miners get cash upfront in exchange for agreeing to sell a fixed percentage of future production at a discounted set price, was part of Yamana Gold Inc's (YRI.TO) white-knight bid for a 50 percent stake in fellow Canadian gold miner Osisko Mining Corp OSK.TO in April. Osisko was trying to defend itself against a hostile takeover from gold sector giant Goldcorp Inc (G.TO).
Yamana's C$930 million ($853 million) bid was partly financed by a C$275 million stream transaction with the Caisse de dépôt et placement du Québec, a large Canadian pension fund. In return for putting up the funds, the Caisse would get 37,500 ounces of gold a year from Osisko's flagship mine at a price equal to 42 percent of the spot gold price.
Although trumped by a higher offer, the bid was one of only a few to use streaming, a decade-old funding concept, as a tool to help pay for acquisitions. At a time when equity and bank funding remains tight for miners after industry profits sank to a decade low last year, streaming companies have big pools of capital that may be tapped to make acquisitions.
In January, Terango Gold Corp (TGZ.TO), a gold miner listed in Canada and Australia, closed a $135 million stream deal with royalty and streaming company Franco-Nevada Corp (FNV.TO) to fund the purchase of the rest of a gold property in Senegal that it did not own already, and to repay debt.
"Inevitably, as streaming gains prominence across the sector, it is increasingly being considered as a form of acquisition finance, and will continue to do so," said Lee Downham, the lead partner for Global Mining & Metals Transaction Advisory Services at consulting firm EY.
The volume of mergers and acquisitions in the mining and metals sector globally fell by 30 percent between 2011 and 2013 to 703 deals, according to EY.
Vancouver-based Silver Wheaton, the world's biggest streaming company, is busier on bid financings than it has ever been and has submitted as many as four bids as part of acquisition teams, Chief Executive Officer Randy Smallwood said in an interview.
Smaller streaming company Sandstorm Gold Ltd (SSL.TO), also based in Vancouver, is working on "an idea" that would involve a stream being used as acquisition financing, CEO Nolan Watson said.
To be sure, stream-backed acquisition finance will likely remain a niche type of funding mostly for mid-sized miners, which have less access to bank and debt funding than their bigger peers.
Opportunities for large mining companies with credit ratings to use streaming for acquisitions may have been cut after ratings agency Standard & Poor's last year changed how it classifies streaming. That change hasn't been followed by other ratings agencies.
BUCKETS OF CASH
The streaming finance model was developed 10 years ago by Silver Wheaton. Its biggest competitors are Toronto-based Franco-Nevada and Denver-based Royal Gold Inc (RGLD.O).
At the end of the first quarter, the trio were sitting on more than $3 billion in capital, built up over a decade-long metals price boom, which ended in 2011.
Streaming companies typically have low operating costs as they often have only have a few dozen employees focused on hunting for financing opportunities.
"We do have significant amounts of capital available to deploy into the marketplace at a time when other capital sources are hard to find," said Royal Gold CEO Tony Jensen.
Shareholders generally want cash to form a "significant" part of an acquisition price and streaming can help to fund this, said John Gravelle, global mining leader at consulting group PwC in Toronto.
Teranga chose to fund its Senegal purchase with a stream as an equity financing to raise cash would have been dilutive to shareholders given the company's depressed share price at the time, said Teranga CEO Richard Young. Taking on more debt could have put its balance sheet at risk.
"The good-housekeeping seal of approval of having a Franco-Nevada do the due diligence and vet your asset... I think is helpful for existing and potential shareholders," Young said.
It's not just buyers who are looking at using streaming finance. Smallwood said large mining companies who want to sell non-core assets have approached Silver Wheaton about adding a stream onto an operation to potentially increase its value for a buyer, and hence its selling price.
Streams are frequently created on by-product metals from a mine, such as silver from a lead-zinc mine, output that investors give little value to. Using this overlooked by-product to secure finance can create value for a potential acquirer.
Streaming also has its critics, who say it is complicated and expensive as forward sales of metals are done at prices that can be 50 percent to 80 percent below spot prices. Unlike debt that can be repaid, streams are long-term arrangements sometimes remaining in place for the life of a mine.
Streaming may not be appropriate to finance all acquisitions, "but clearly it brings certain advantages and in such a difficult M&A market it could be the difference between a deal progressing or not," EY's Downham said.
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