* Cash-rich royalty companies poised to strike new deals
* Equity market slump puts junior miners in a tough spot
* Developers, juniors, mid-tier miners all vying for funds
By Euan Rocha
TORONTO, June 3 Royalty companies that raked in
cash from strong precious metal prices in the last three years
look poised to drive a wave of deal activity in the Canadian
mining sector, especially among junior players hungry for
These companies, which fund projects in return for a portion
of future revenues, generated huge amounts of cash flow from
existing deals as the price of gold and silver soared since the
beginning of 2009.
Now, with the recent pullback in precious metal prices and
slumping stock markets, they could be the saviors for small and
mid-tier miners wh o are eager to grow but strapped for capital.
Europe's debt crisis and slowing Asian growth have tempered
banks' appetite for lending. And miners are not keen to issue
equity when their share prices are severely depressed, leaving
few alternatives to royalty and stream deals for small miners
looking to fund project development.
"A lot of the juniors we work with are looking at turning
over whatever rock they can in order to get financing. They are
exploring it," said Krisztián Tóth, a partner with law firm
Fasken Martineau in Toronto.
"But as to whether they are going to get it is really going
to come down to the quality of the project."
Miners typically try to avoid royalty and stream deals, as
they tend to negate any future upside from rising metal prices.
In royalty deals, financiers provide cash upfront in return
for a set percentage of future income. In stream deals miners
get cash in exchange for agreeing to sell by-products in the
future at a discounted price.
Royalty companies like Franco-Nevada Corp, Silver
Wheaton Corp, Royal Gold Inc, Sandstorm Gold
Ltd and Anglo Pacific Group now find themselves
in the perfect spot to strike new deals and secure their own
"It's the busiest we have ever been and we're just trying to
make sure we only engage with people that we can realistically
do some business with," Franco-Nevada Chief Executive David
Harquail told Reuters.
"It's a function of what the available sources of capital
are," he added, noting that investors do not want to buy into
new mining equity issues now, even as the number of banks
willing to provide project debt financing decline due to the
European debt crisis.
The level of equity financing activity in the metals and
mining sector has swooned this year. Oreninc, which tracks
equity financing activity in Canada, notes that first-quarter
financings in the sector fell almost 50 percent from year-ago
Silver Wheaton, one of the largest royalty companies, last
month reported a 20 percent increase in first-quarter earnings.
The company, focused on silver stream deals, said it is actively
scouting for new targets to build on its portfolio of assets.
Chief Executive Randy Smallwood noted that Silver Wheaton,
which has $1 billion of cash on hand, an undrawn $400 million
revolving credit facility and forecast annual operating cash
flows in excess of $600 million, is well-positioned to pounce.
Other royalty companies are also cash rich. Gold focused
Franco-Nevada has working capital on hand of almost $1 billion,
an undrawn credit facility of $175 million and investments that
are valued at over $100 million.
"Really, if you look at it, we could do $2 billion of
commitments right now, just with what we have and what we will
be cash flowing over the next three years," said Harquail.
And there is no shortage of companies vying for these funds,
from miners in the development stage to junior producers.
"I think particularly the smaller cap companies are actively
looking at streams as being a financing alternative, so that is
definitely back on people's radar screen'" said Mike Boyd, who
heads mergers and acquisitions at CIBC World Markets.
Earlier this year, junior gold miner Lake Shore Gold Corp
struck a $50 million deal to sell Franco-Nevada both an
equity stake in itself and a royalty interest on the sale of
minerals from its Timmins West mine in Ontario.
In May, Franco's smaller rival Royal Gold struck a deal to
buy a net smelter return royalty on the Ruby Hill gold mine from
International Minerals Corp, while Sandstorm settled on
two separate royalty deals with Magellan Minerals Ltd.
"To do a quality streaming deal, you have to be bankable,"
said Benjamin Cox, who heads Oreninc. "You need to pass over the
bankable feasibility threshold to do a deal that is not
absolutely horrific, because streaming companies do not like
taking construction risk, unless it's construction risk they
Even some mid-tier miners are now mulling stream deals to
finance mega projects. Last month, Inmet Mining Corp
said it plans to raise roughly $1 billion from a stream deal to
fund a portion of the construction costs for its $6.2 billion
Cobre Panama copper project in Central America.
"Right now we are running ahead," said Harquail. "But it's a
bit of feast and famine. When the equity markets are back, we
probably won't do too much business."